Longevity Calculators

When are you going to die?  I don’t see this on many fact finds and it is a bit of a brutal question but I think that we should all be asking clients and getting their opinion on the matter.  I am often putting together investment and retirement planning strategies with a ‘medium’ or ‘long’ term perspective which is fine but the issue of longevity becomes more relevant when recommendations and in particular financial plans are based on an assumed date of death.

I do a lot of lifetime cash flow forecasts and there has to be a defined start and end date.  The start date is easy but the end date not so?  I have seen and have often used each of the following strategies:

• The client wants to use a particular assumption based on his or her own views or family background.
• The client and adviser agree a ‘reasonable’ period based on health, background etc.
• Mortality tables are used.
• A standard assumption of 99 is used (this is often the default in most financial planning tools).

It is highly unlikely that any assumption will be correct other than when a terminal prognosis has been given.  However, technology has helped us to get a bit more scientific and this article looks at a new Longevity Calculator from Life Trust.

I have used myself as an example to see what it tells me.

• My parents are both close to 70 with no serious health issues so I would think that I have a fairly good chance of getting beyond that.
• The faculty and Institute of Actuaries mortality tables say that I will live to 83 which will probably be the State Pension Age by the time I get there.
• The New Model Adviser Lifeometer (used to be Deathometer but clearly someone more politically correct got hold of it) says that I was born in a good year but that on average I will only make it to 69.  Better cancel the 70th birthday plans then.

Each could be right or wrong – we won’t know until it’s too late.  Life Trust has produced some very useful information and tools on their site – start by having a look here.  The new Longevity Calculator is of particular interest.  The underlying data is based on the same mortality tables as above and the experience of pensioners in UK insured pension arrangements.  Rather than giving me an age I can expect to die the calculator shows my chances of reaching a certain age as you can see below.

The calculator is very simple using two sliders to change the parameters.  This shows that I have a 94% chance of reaching the same age as my parents.  Having played with it a bit more I have a 62% chance of reaching age 83 which the mortality tables say and, most interestingly, a 4% chance of reaching 99.

Now if I am writing a lifetime cash flow based on the assumption that my money needs to support me until age 99 am I being fair on myself?  This surely means that I will die earlier than expected with too much money left when I could have spent more during my lifetime?  The flip side of course is that I set a shorter term and live longer than expected and run out of money!

The Life Trust tool also allows you to plot a joint life expectancy and has some very useful inflation calculators which show what your income will be worth in the future:

And also what things might cost in the future:

The issue of death is important with any form of financial planning and this new tool is one I will use to give clients a more realistic and informed view.