The Actuaries Institute Retirement Incomes Working Group has published a research note which looks at the importance of accurate calculations of life expectancies in retirement planning. Our very own Technical Services Manager, Melanie Dunn, assisted with this research and is passionate about helping retirees and advisers understand their longevity risk. This involves not only understanding how long a client might live, but also the likelihood of them living to different ages. How to accurately calculate those probabilities is critical for retirement planning.
The Research Note highlights that the methodologies used by both superannuation funds and Australian Financial Services licensees in many of their retirement calculation tools may not always reflect best practice when it comes to allowing for how long people live. The research suggests the minimum approach for calculating life expectancy is to:
- Refer to the most recent Australian Life Table (currently 2015-17)
- Choose an appropriate mortality improvement table (e.g. 25 year improvement factors published with ALT 2015-17)
- Include the age of both persons if the household is a couple (we can calculate the age to which we expect at least one person in a couple to survive to)
- Show results in a way that includes the range of possible lifespans that the individual or couple may experience
- When looking at groups of lives, model the full distribution of lifespans rather than just focusing on the average life expectancy
For example, for a 65-year-old female retiree, their life expectancy allowing for 25 year improvements in mortality is age 89. It is important to remember that this is just the ‘average’ age based on all Australian 65-year-old female retirees. There is a chance that some 65-years-old retirees will pass away next year, and some will live past 100, and everything in between. This uncertainty is what makes retirement planning for an individual so challenging. Over 50% of the 65-year-old females retiring today will live past their average life expectancy of age 89.
One planning horizon that could be considered if the retiree wants more confidence is to calculate the age to which we would be at least 80% certain that income will last for life. For a 65-year-old female retiree to be sure her planning horizon is sufficient and have at least 80% confidence her income would last for life, her income would need to last until age 97.
Accurium’s survivorship calculator has been designed with these principles in mind.