The asymmetry of life expectancy


According to Australian statistics, the average male aged 65 can expect to live until age 83. For females, it is age 86. (These statistics are extracted from the Australian Life Tables 2005-07). That might seem like a useful base upon which to plan for retirement. How much savings are needed before someone is able to retire depends on how much they need to meet living expenses and how long they are going to live. Predicting living expenses is a lot easier than predicting your remaining lifespan, but you have to start somewhere.

If people make retirement plans by judging their saving and consumption patterns according to an expectation of living  until their mid 80s, then mostly they will get it wrong. This is where the asymmetry comes in. According to the same statistics, the average male who is currently aged 83 can expect to live another 7 years until 90. By the time he attains 90, he can then expect to live until 94. The average female currently aged 86 can expect to live until 92. If she makes it to 92, she can then expect to live until 96.

Meanwhile, approximately half of our age 65 retirees who had based their plans on living to their mid 80s, instead died before reaching that mark.

So we have this peculiar outcome – plan your retirement needs based on an assumed average expectation of life at retirement age and you will either overestimate your needs (by dying too early) or underestimate your needs (by surviving in accordance with your plan.)  You can’t win.

The asymmetry of life expectancy.

Of course, there are solutions to this conundrum, but they will have to wait until another post.

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One thought on “The asymmetry of life expectancy

  1. Isn’t this equally an example of marginal utility? Changes in the wealth of the deceased result in no change to their marginal utility – they are equally unable to spend $1 million as they are to fell depressed about being down to their last five cent piece. At the same time, a living 83 year old with a lean bank account could have a big change in utility if their wealth increased.
    That is, it seems like the pain of dying without having spent 100% of the kids’ inheritance is not equal to the difficulties caused by running out of money prior to running out of longevity.

    Of course, not everyone has a choice about stopping work before amassing a pile that hedges against unforeseen longevity. A part of the advantage of risk pooling via a financial institution is that not only the is the risk transferred but so is the job of quantifying the risk. That is, only a small percentage of consumers could accurately calculate the lump they need to live for an uncertain time period under uncertain inflationary conditions is very small, but hopefully a high proportion of superannuation funds could make the same calculation about a group of policy holders.

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