Single Life Expectancy table

Single Life Expectancy table

Life expectancy is often discussed, and often out of context.  For example, in your earning and investing years, traditional money managers and advisors will talk about a systematic withdrawal from your portfolio to fund your retirement.  They’ll benchmark their success or failure rate on a life expectancy, and often use age 85 or 90.

It sounds great when you are 65 and your advisor says “I ran hundreds of scenarios on your portfolio based on past market performance, and with this allocation of stocks and bonds and withdrawal rate of 4% per year, you have only a 25% probability of  outliving your assets.”  What the advisor doesn’t say is that they only ran the illustration to your age 90.

Well what happens if you live past age 90? How likely is that? And what happens to probabilities when you push life expectancy out further?

Average life expectancy doesn’t tell the whole story or highlight your personal risk factors.  According to the Social Security Administration, even though the average life expectancy for a US male is just over 80, when you are 80, you still have an average remaining life expectancy of 8 years.  So in other words, if you are moderately health and active and expect to live past  80, you probably should be planning to live well past 90 or beyond.

If you are married, plan on living longer still…..And for women, add another 5 years to the expectations…… And finally, if you own annuities, your longevity is likely to be longer still! it’s an actuarially proven statistic- lifetime annuity owners live longer than non-annuitants!

A recent visitor had a couple questions on this topic:

If our plan is to use secondary annuities and then transition to lifetime annuities as the stable portion of our retirement portfolio, given our ages 57 and 59(My Wife) and assuming higher than average longevity, at about what ages (ballpark) do the lifetime annuities begin to be the better investment for us? That info will help us focus in on the  payout term of the secondary annuities that we are selecting.

This answer is an interesting explanation of life annuities, and represents some fascaniting information I learned in Moshe Milevsky’s new book.  I thought I’d share my reply to this client, below:

The probability of mortality (the basic driver of life income annuities) is appx 9% per year for any given set of people.  Of 100,000 60 year olds, 9000 will die this year….. of 91,000 61 year olds, 8190 (9%*91,000) will pass away the next year…. and of 82,810 left in the same block of people, 7453 will pass away in the third year.  What you can see in this is that your odds of living long get better with each year that you live….

So what, you might ask? Well, when you get older and wait to buy an immediate annuity, the payout rate may be lower than you would hope it to be, for the simple reason that you have survived all those years and are a member of a more and more rarified, healthy elderly set of people….

Here’s another fun fact- people who own life annuities on average live 5 years LONGER than average….. on top of couple’s who live several years longer than singles of the same age.  You and your wife are blessed with both life-enhancing attributes!

The beauty of the lifetime income guarantee (LIG) contracts is that you truly buy insurance- a lump sum principal now, use it or lose it, produces very high payout rates at age 85, because there are 25-27 years of probability that the insurer will come out ahead.   You and your wife  are healthy and plan to live a long time, so have great odds here of beating the insurance company.  Let them carry your longevity as a risk, and let you reap that reward without worry.

What’s it all mean?  It may mean that even though the global rates are low right now, the demographics and mortality tables may tell you that the time to buy a LIG contract is right now, to capitalize on the mortality credits inherent in a long deferral period…

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There’s more to this than this article alone.  Depending on your other assets and bequest motives, this strategy makes both the now and the later a LOT easier to plan for, when you have definite periods.  For example, plan from retirement until age 85, knowing your Lifetime Income Guarantee contract   kicks in at age 85.  It’s also a lot more tax efficient.

Please feel free to give  me a call to discuss this in light of your own situation.

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“For all time periods and for all portfolios, the addition of the annuity leads to a decline in the portfolio failure rates.”

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