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.