For financial professionals only
In episode 3 of our Let’s Talk Retirement series, Retirement Specialist Patrick Ingram will be talking to Steven Baxter, Head of Longevity Innovation & Research at Club Vita, about problems with average life expectancy, emerging trends in later life mortality and the impact of Covid. To reserve a spot at the webinar, please click here.
If you’re reading this article, you’re a financial services professional, advising people with retirement capital to invest. That capital is highly likely to be more than Mr and Mrs Average (whose big financial challenge is probably their debts).
So, why look at longevity data for Mr and Mrs Average? ONS data, used without care, risks anchoring your thinking about life expectancy to the wrong information. This is unhelpful in several ways.
Your clients are not average
The latest ONS release for life expectancies says:
“People aged 65 years in the UK in 2018 can expect to live on average a further 19.9 years for males and 22.0 years for females.”
Quoting these statistics may fix it in a client’s mind that they need only plan for a retirement of around 20 years. This is not at all helpful.
Planning to 100 is not ‘safe’
A standard planning approach to longevity is to neutralise the risk of extreme old age by running a cash flow model to 100. But how safe is that really? For the six individuals above, their chances of living past 100 are low with only women in good health having a 10% chance of becoming a centenarian.
A different picture emerges for younger people. For 55 year olds, median life expectancies are a year or so higher, and men are beginning to run a 10% chance of reaching 100.
Mortality credit: think about it
Neutralising the longevity factor by cash flow modelling to 100 can make a financial plan sub-optimal and creates a potential conflict of interest.
Imagine a very cautious client with a risk appetite for only investing in gilts. How much do they need to withdraw £10,000 a year from 65 to 100? 35 year gilt yields are below 0.5% at the moment meaning Mr Cautious would need at least £320,000.
Few rational people would accept this advice, because a single life annuity would be £100,000 cheaper. Why? Because of mortality credit. Half of all annuitants die before their average life expectancy, allowing the provider to pay out more than gilts yield.
As an aside, affluent clients can expect to take more than their fair share of an annuity pot for the reasons explored above. They are likely to live longer than Mr Average. Especially affluent women.
Live for now
This is where the actuary’s concept of ‘viability’ comes into its own. By looking at the odds of survival overlaid on the odds of both good and bad returns, brought together in a single number – a financial plan can be optimised and regularly re-optimised at the acceptable or required level of planning risk.
For someone who needs 110% certainty, that can’t be drawdown. Drawdown gives you upside possibilities and flexibility but carries risks. As your life extends you become progressively more likely to be one of those who lives a long time, for example.
References: Past and projected period and cohort life tables, 2018-based, UK – bulletin
The Bank of England daily estimated yield curves for the UK – web page
Join us for Let’s Talk Retirement and Longevity with Patrick Ingram and Steven Baxter on Thursday 2nd July at 11am. The webinar is accredited with 1 hour CPD and you’ll have the chance to share your views and ask any questions on retirement and longevity.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.