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Three crucial mistakes about life expectancy

I've found that many people have a vague idea about how long life expectancy is, and that it is typically underestimated. It's an important subject, because if you're going to plan to make your assets last a lifetime, you need to make some estimate about how long that lifetime may be.

Why do so many people misunderstand it? Is it the arithmetic or the concept? Let’s take a look. (Spoiler alert: the arithmetic is simple.)

Let me make three points about life expectancy.

1. Most people misunderstand the arithmetic

Even if they have heard that in some country (call it Country A) life expectancy at birth is 80 years, they don’t understand that if they have reached the age of 65, the average person can expect to live more than another 15 years (in fact, probably more like 20 years). Here’s how the arithmetic works:

Suppose I asked you for the average of the numbers from 0 to 100. It’s not a trick question. It’s simple arithmetic. You know the answer is 50.

Now suppose we leave out the lower numbers and determine the average of the numbers from 40 to 100? Obviously, it’ll be higher; in fact, the average now rises to 70.

It’s similar with life expectancy.

Suppose we encountered a peculiar population of 100 people in which one person dies before the first birthday, one dies between ages 1 and 2, and so on, the last one dying between 99 and 100.

What would be the average age at death? Again, not a trick question: it’s 50. Half the people will live longer than that, half won’t reach it.

Now suppose we leave out all of those who die before age 40, leaving us with a smaller group. The average age at death of this smaller group is 70. Half of those alive at age 40 will live longer than that, half won’t reach it.

So, what does this tell us about the life expectancy of this peculiar population?

It tells us two things. First, at birth, if we don’t know which person we’re talking about, all we can talk about is the average, and for the average person, then, the life expectancy is 50 years. Second, if we consider only those who have survived until age 40, and again we don’t know which individual we’re talking about, their average age at death is 70. Their future life expectancy, once they’ve reached 40, is another 30 years, because that’s what ‘life expectancy’ means: it’s the average number of future years to be lived by the average member of a well-defined group.

Notice that the people in the second group (those who have survived to age 40) are also members of the first group (the entire population). But the two groups are not the same, even though they contain some identical members. The second group excludes those who have already died before 40; that makes it a different group, and a longer-lived group. So, if we are to define life expectancy, it’s important to define the group we’re talking about very clearly.

OK, now let’s go back to Country A, and interpret those numbers.

The numbers tell us two things. First, if you include the entire population, the average age at death is expected to be 80. Second, if you exclude those who have already died before age 65, and include only those who survive past that age, their average age at death is higher than 80; in this case it’s around 85. And that’s why the future life expectancy of someone in Country A who has already survived to age 65 (a smaller group) is a further 20 years, not the 15 years that people often misunderstand it to be.

Life expectancy tables vary by gender (typically, the life expectancy of a female is longer than that of a male), by country, by race – all kinds of factors, in addition to age. You may find a website with a calculator that helps you to estimate your future life expectancy. If your health isn’t average (it may be better or worse), your doctor may be able to help.

2. Averages disguise the unpredictability

Talking about the average conceals the fact that, for any individual, the actual date of death is uncertain. For most people, until they’re near death, their specific future life expectancy is still pretty much unpredictable.

When you make financial plans about the future, it’s important to take this unpredictability into account. There are many ways to do so, the subjects of future posts.

3. The longer life expectancy of one member of a couple

More specifically, how long before the second death of the couple. Techies call this the ‘joint and last survivor’ life expectancy. It’s important because it’s necessary to provide for the longer-lived member of a couple, whichever one that may turn out to be.

Suppose there’s a couple whose individual future life expectancies, at some point in time, are roughly 15 years and 20 years. How long until the second death?

Most people say: well, after 15 years you expect one to die, and after 20 years the second one will die; so, it’s 20 years to the second death, right?

It actually turns out to be a little more complicated than that. I won’t go into the arithmetic. I’ll just tell you why the expected time to the second death is longer than 20 years.

The one with the longer expectancy has a 50/50 chance of living longer than 20 years. The one with the shorter expectancy has some chance (though much less than 50/50) of living longer than 20 years. Between them, they have a bit more than a 50/50 chance. And so for the couple together, the average expectancy to the second death is longer than the longer of the two individual life expectancies.

 

Don Ezra has an extensive background in investing and consulting, and is also an accomplished author. His current writing project, consisting of blog posts at www.donezra.com, is focused on helping people prepare for a happy, financially secure life after they finish full-time work.

8 Comments
David Orford
February 04, 2021

In Business Planning one looks at the Most Likely outcome as well as a Pessimistic and Optimistic outcome. Applying that concept to personal financial planning means what is the plan should you die too early and if you live too long. Assuming everyone dies at their life expectation age is misleading as only 3% of those aged 65 die at that age. The standard deviation is around 8 years. Longevity risk might be higher than investment and inflation risk.

Retirees greatest fears is running out of money - by living too long.

Lifetime annuities might be in the Best Interests of retirees.

Shylock
January 18, 2019

The discussion should be about quality of life rather than longevity.

You will need more money in your first 5 to 10 years of retirement because you are younger and have different needs to someone aged 80. Albert's comment is spot on.

The needs are usually a new car, repairs to the home and o/s vacations, all big ticket items.

Enjoy the fruits of your labour !

Maybe downsize your home and invest the surplus.

The combined male/female "mean age of death" in 1979 was aged 66 years and in 2016 it was aged 70 a long way from the 100.

Not many people will live to 100, so why budget for that target ? As Albert said in his comment, "you are not going to need much money as you get older".

Your health is a very important factor when making any retirement decisions. Flexibility in framing a retirement plan is paramount.

My philosophy is to enjoy the retirement years from 55 or 60 until 70 when most people will still be reasonably fit and active. Travel the world if you can and also enjoy time with your grandchildren etc. etc.

"Make love in a hammock" just don't fall.

As we age we get slower and need less for clothing and travel, hopefully we will still have a licence and a car.

We have 5 years worth of income from our SMSF in cash and the rest in equities paying a decent income. The cash is to ride out any bumps in the investment cycle and this has worked out well, so far. Bank interest rates are lousy but we sleep well in the knowledge that our retirement income is secure and the fully franked dividends keep coming. ( Shorten looks like taking that money from self funded retirees ).

Enjoy the autumn years while you can; you have worked long and hard and now it is time to relax and smell the roses instead of thinking about pushing up the daisies.

Is it time for that gin and tonic ?

David
January 17, 2019

I'd be interested in knowing the average age for entry to an Aged Care facility.

Laurie
January 04, 2018

Planning for longer than average life expectancy is a great idea but not so sure about the analysis underlying the third point, Don

Mr LE 85 has a 50% chance of not surviving past 85 and a greater than 50% chance of not surviving past 90.

Mrs LE 90 has a 50% chance of surviving past 90

So on average, there is a greater than 50% chance they will not both survive past 90 and thus a less than 50% chance they will both survive past 90. And on average, we could expect the age at death of any couple in their circumstances to average 87.5

It would need a detailed study to demonstrate that a surviving spouse lives longer than average after the death of their partner.

richard
January 04, 2018

great comments ,,thank you ,,,,as most or all of us now not working ,,, your biggest asset is something hard to access or not at all.... our house ... ,more needs to be done to be able to access some of your wealth in your house,, this could remarkably change your life style in retirement mode and create a industry in it self ... for advisers and the like ...yes there are reverse mortgages and the like ,,not popular ,,even advisers advise to use as a last resort,,any ideas

Albert
November 12, 2017

you are not going to need much money as you get older

Paul H
November 09, 2017

Interesting article. Gary M's comment is thought provoking - and adds weight to my thoughts on investing for higher return in early retirement. Simply put, my thoughts are that one should still have a greater share of their investments in higher return (also higher risk) investments as they should have ample time to ride out the fluctuations likely. Going to lower return (and safer) investments may mean that the money runs out too early. And the dream of leaving something for the kids seems to be a dream these days.

Gary M
November 09, 2017

My approach is simple – I always tell couples “work on the assumption that one of you is going to live to 100. Forget about helping out the kids with money before you die – you are going to need it yourself! Even if you spend the last dollar on the day you die – that means a 40 year investment horizon if you are now 60, etc. That’s a long time – it’s probably longer than your entire working career. And if you plan to leave anything for the next generation after you die, then add another 20 or 30 years to that investment horizon. So even if you are well into ‘retirement’ now - welcome to the world of ultra-long term investing!”

 

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