3 Questions to Evaluate Longevity Risks in Retirement
Longevity risk is the term used for the situation where your assets are at risk of running out before your time in this world runs out. To put it bluntly, this means that your assets and retirement savings could not last long enough to sustain your quality of life for the rest of your retirement years.
This is because none of us can predict if our actual retirement years would be longer or shorter than our life expectancy. Some of us might outlive the median life expectancy, but some of us could also live far beyond it. A long life is good, but it would also be more expensive.
To estimate longevity risks, what you need to do is to look at current data and statistics about mortality and survivorship rates. Of course, these data may not always be true or accurate for you, but it is a good base to start with. While you search for such data, you must ask yourself the following questions:
From what age is life expectancy measured?
Life expectancy is measured from birth, of course. But as a retiree, it is important to note that the point of expectancy should start from 65 onwards. This may seem obvious, but it is a good point to take note of.
Some studies might manipulate statistics and numbers to make it look bloated when in reality, the real estimates could be much less since you have already reached the age of retirement. So this is a very important thing to keep in mind.
Is life expectancy calculated from current year mortality rates or projected future mortality rates?
The most common and reliable source for mortality rates is the Social Security Administration’s (SSA) Period Live Tables. This type of data calculates mortality rates using the available data from the previous year. It keeps count of how many 70 or 80-year olds died from the last year and then come up with an estimated life expectancy for those that are 65 years old in the current year.
Although this data could be a good basis, it could still underestimate actual life expectancies, especially since modern health care and long-term care keeps improving. The solution is to use an alternative cohort life table that projects mortality rates on certain individuals for a period of time.
This is because cohort life tables take in future mortality improvements when it comes to estimating life expectancies. Thus, it projects a longer life expectancy and it is more reliable data if you are trying to calculate longevity risks.
What is the underlying population from which mortality and survivorship rates are calculated?
Most of the available data when it comes to life expectancy and longevity risks are US-based. This might not be necessarily applicable for you if you are from Europe, Asia, or Africa. In fact, even if you are a US citizen, the estimates might not be correct for you, because the study might be done in an urban city or a different state.
The level of education, health care system and social security benefits can greatly affect life expectancies and mortality rates in any population. These factors differ from state to state and from country to country. So as much as possible, be mindful of where the data was gathered whenever you find data for life expectancies, retirement income, and longevity risks.
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