Not exactly a seasonal issue to consider but one that, triggered by an excellent recent gig at the Oxford O2, I find myself thinking about a lot as I look forward to a Christmas break rebuilding cashflows for loads of clients who have joined me from the firm I used to work for.
One of the big questions in financial planning is “will I have enough to live on” and this necessitates having some idea of how long you are likely to live for. If you want to be sure that you don’t run out of money then ideally you would book the point at which you are going to check out of life and plan accordingly. Since this isn’t how life works, instead you have to make an assumption and work to that.
One approach would be to assume a worst case scenario and assume that you live to 120. If your cashflow plan indicates that you can afford that then in one way that’s great. However, given that the likelihood that you would live that long is tiny, for the 99% of people who don’t, you risk hoarding assets that you will never need. You risk wishing that you had either spent more and enjoyed your life more, or that you had passed assets on to your children and grandchildren rather than leaving them to be taxed.
Most people don’t take this approach because they see the inherent problems with it.
One trap is that of average life expectancy quoted in the media. This has a couple of components that can cause problems. The first is the perennial point of which average you are using : Mean, median and mode; three averages, and three different answers normally; the second is what life expectancy you are being told about.
Looking at the data tables which produce the average life expectancy soundbites, an average boy born in England between 2021 and 2023 is expected to live for just over 79 years; however, at age 79 it is projected that of 100,000 baby boys at the start, 61,145 will still be alive. It isn’t until just over 82 that this figure drops below 50. Just over 25% are still expected to be alive at age 89 and if you reach that age, you have a c85% chance of making age 90.
So if you see sound bites that tell you that the average life expectancy for a male has reached 78.8 years for males in England, and decide that as you are average this is a reasonable assumption for your cashflow planning, you may be seriously disappointed.
The second trap is that of personal experience, making assumptions based on family and friends. Often this is informed by a recent experience. The first of my group of Uni friends died just over 7 years ago for example and suddenly you find yourself confronting your own mortality. Despite understanding that he died tragically early, it impacts the way that you view your own mortality and the more of your friends, family and acquaintances that die the more you can find yourself thinking that you may be next.
As well as that type of personal experience there is the tendency to benchmark ourselves against parents and grandparents. There is some validity to this, in particular if they all lived into what we would now consider to be old age however, context is needed when considering previous generations.
As an example, if I look at my grandparents, both my grandfathers died in their 60s. However, both were heavy smokers, in an age where heavy smoking was rife and played a large part in male mortality figures in particular, and both died of cancer and cancer related illnesses.
Born at the end of the 19th century, their average (yes, I’m using average for this example despite everything!) life expectancy at birth would have been less than 50 years however, this was tremendously impacted by infant mortality rates. Making it to 65, someone of their generation could on average have expected to live to their mid-70s but today would expect to make mid-80s instead .
Changes in society and improvements in healthcare over both their lifetimes and our own lifetimes mean that unless there is a real known reason, having grandparents and parents who died before reaching 80 does not necessarily mean that it is reasonable to assume that you will not live that long either.
There is an excellent life expectancy calculator that the Office for National Statistics offer online that is great for informing the discussion of what is a reasonable expectation. In particular it is good because it allows you to think in terms of risk rather than just expectancy. It’s not so much what might my life expectancy be as it is what is the risk that I outlive my money.
As with anything generic, it’s just a starting point to a discussion, but one has to start somewhere and in our view it’s a good place to start and more likely to end up with something reasonable than a media soundbite or a personal bias.
