Longevity Risk: Is Planning To Age 100 Practical?

In financial planning circles, longevity risk (the risk that you will live to a very old age and, as a result, run out of money) is one of the toughest challenges to meet with any confidence. The reality is, none of us have any idea when our days will run out. Some people very sadly and unexpectedly pass immediately before or after retirement, while others end up living well into their 90’s.

To complicate things, no one relishes the idea of running out of money while they have years, or even decades, of life left in them. Especially for individuals who have led comfortable lives, the idea of living any of their years in seeming poverty can be terrifying.

Aware of these issues, there is a trend in the wealth management field to counsel people to plan on living until age 100, or even longer. Articles abound (such as this one here) about the importance of stretching our longevity estimates to ensure we can live in comfort until our last days. But is this practical? Or even advisable?

Who Says Living To Age 100 Is Realistic?

If you are looking for confirmation that you have a great chance of living past age 100, you can go online and find plenty of it. For this article, I went to several sites (insurance companies, health care companies, and universities) that had longevity calculators and put in data that was as close to identical as possible. I said I was a 25-year-old male, 5′ 11″, who rarely drank, never smoked, exercised regularly and ate well. The longevity estimates I received ranged from a low of 84 years, to a high of 100.4 years. The majority of results ranged from 96 years to the 100.4 year maximum.

Further, recent studies are sounding the warning the we should be re-calibrating our views of longevity risk, as the chances of living to, or past, 100 are growing exponentially. This one from the UK was highlighted to me recently. It boldly predicts that, if I am 25 years old today, I have a 14% chance of hitting the age of 100, and a 10% chance of going all the way to 102, as demonstrated in my printout from their longevity calculator below:

Expected longevity risk, per a UK study.

I guess I’d better get saving! That’s a pretty reasonable chance of hitting triple digits, and I sure don’t want to be homeless and destitute at the age of 101, right?



Caveats To The Longevity Projections

Before fully embracing the idea that I will have an incredibly long and healthy life, it’s important to note that these projections, like all projections, have some caveats. Since the future cannot be known in it’s entirety today, some educated guesses have to be made in order to generate what are deemed to be satisfactory results. In longevity estimates, the grand-daddy of all caveats is found in this line, from the UK study referenced above:

“Allowing for expected future improvements in mortality…..”

Yes, there is certain weight given to the abilities of scientists, researchers, medical professionals and others to reduce our rates of mortality and thereby increase life expectancy. This is, of course, entirely reasonable, as advances in medical science and procedures have been nothing short of breathtaking in recent decades. Further, the world we live in is safer than ever. Cars have seat belts and airbags, cigarettes come with scary and graphic warnings, and we know more about preventing and curing disease than ever before.

So, looking back through history, what we would expect to see is a long and progressive increase in longevity up to our present day, right? That would confirm the assumption of continually improving mortality rates due to scientific progress, and put to rest any question that today’s young people need to plan on managing longevity out past age 100, wouldn’t it?

History Doesn’t Seem To Support The Theory

Fortunately, we have plenty of historical data to fall back on. First, let’s look at the percentage of the population that was age 100 or more in recent years. In Canada, after the 2011 and 2016 censuses, significant noise was made about the fact that the fastest-growing population group was centenarians. What was less commonly announced was the fact that the growth came on an incredibly small base of people. Here’s the percentage of the Canadian population aged 100 or over, by census year:

2001 – 0.0122% / 2006 – 0.0142% / 2011 – 0.0174% / 2016 – 0.0234%

That is a tiny, tiny, percentage of the overall population. In fact, if there were 40 times more centenarians in 2016, they still wouldn’t amount to 1% of the total.

Breaking the 2016 census down further, we see just how incredibly difficult it is to live to see a triple-digit age. In 2016, Canada’s population was 35,151,728. Of that, 770,780 (2.2%) were people aged 85 and over, and there were 8,230 aged 100 and over. So here’s the kicker: even if you had reached the age of 85 in 2016, which is already higher than the average life expectancy that year, it’s reasonable to assume you would only have something like a 1% chance of seeing 100.

(Now, if you’re a statistician, don’t bother writing to tell me that isn’t exactly how the math works. I’m aware of that. But looking at the population numbers in 2016, the math I’ve used will be close enough for our purposes.)

The reality of this is demonstrated in a 2014 report from Statistics Canada entitled: Ninety Years of Change In Life Expectancy. This report noted that, while total life expectancy had increased dramatically between 1921 and 2011, that was largely due to improvements in infant mortality, childhood diseases, and other forms of premature death. As you start to look at older cohorts, the change in life expectancy becomes much more modest. This is exemplified in the following chart from that report:

Statistics Canada longevity risk at birth and age 90, over time.

Note that, while longevity from birth increased markedly, for those who managed to live to age 90 the outcomes barely changed at all. In 1921, a 90-year-old could expect to live another 3.4 years, and by 2011 it was 5.3 years. This really drives home the point that the fields of medicine and science are absolutely helping more people to see old age, but they are not, on average, extending the total age that otherwise healthy seniors can expect to attain. As we saw previously, after 85 the rate of mortality is pretty high.

If the last 90 years, with the incredible medical advancements we’ve seen, haven’t moved the needle significantly in this regard, why should we believe the next 30 or 40 will?

Why It’s Important: Don’t Waste Your Money

The foregoing information is extremely important to think seriously about when looking at your financial planning. Outside of the FIRE (Financial Independence/Retire Early) bubble, the reality is that the vast majority of the population is struggling mightily to afford any kind of retirement at all. If you’re older than 45, you’re probably stretched pretty thin and making sacrifices already, while using more reasonable estimates for your longevity risk.

Now you have people telling you that you need to save even more, and deprive yourself more today because, hey, “you might just live to 100 don’t you know!

More often than not, this may be nothing more than a ploy by your financial planner or insurance agent to help themselves to more of your money. Don’t buy it just on their say-so.

Looking at statistics and history, there are great arguments for planning to live to age 90 or 95. And if you have a bunch of family members who experienced extreme longevity, you may want to extend that a bit to be on the safe side. But if you’re an average person, with a family history of average longevity, do you really want to dedicate yourself to saving for an additional 5 or 10 years of retirement?

Investing and planning is all about risk and reward. At the present time, and throughout modern history, only a small percentage of individuals have lived much past 90, let alone 95 or 100. Do you really want to dedicate a substantial portion of your savings to an outcome with such a small chance of being realized? Is that the best use of your assets?

Those are questions that are well worth asking.


Important Disclaimer: the information above is for general informational purposes only and does not in any way constitute an offer for the purchase or sale of any security and is not intended to be considered comprehensive or personalized financial or investment advice. themoneygeek.info assumes no responsibility for the use or application of this information. Always consult a tax, investment, or other appropriate professional before adopting any new financial strategies.

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3 thoughts on “Longevity Risk: Is Planning To Age 100 Practical?”

  1. To add another wrinkle to the mix: to what age should you plan the portfolio to last for if your spouse is 31 years younger than you and you wish the legacy to last through both partners lifetimes?

    Reply
    • Typically, I’d choose a reasonable life expectancy given health, family history, etc., and plan long enough for the younger partner to hit that age. To be reasonably accurate, that may mean a shorter life expectancy for the older partner. For example, you may plan for the older partner to reach average age, say 85, at which point pensions cease (or carry on with a survivor pension, as appropriate) and expenses are adjusted to reflect the survivor only. Then plan for the remaining spouse to live to a longer age, such as 90 or 95. This would be a reasonably conservative way to plan. You may also want to experiment with a shorter lifespan for the first to pass, to see how that affects outcomes.

      Large age discrepancies between partners do complicate planning somewhat. It’s a good idea to test multiple scenarios given the extra complexity.

      Reply

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