Many clients and their advisers use the wrong basis for estimating life expectancy. This matters because it misleads people into thinking they have to plan for a much shorter lifespan than they should.
The heart of the problem is that many advisers still use average life expectancy figures as the basis for guiding clients on how long they might live. And the internet is mostly not much assistance. Virtually all websites that purport to provide help in this area use average life expectancy.
What is more there is also quite a lot of variation even in the average life expectancy figures websites will give you. I did a fast and dirty survey of a few of them. The grimly witty “Death Clock” predicted I would die aged 78 years, one month and 29 days. Disappointingly it did not suggest a time of day for this momentous event. TalkTalk predicted I would live to a much more optimistic 91 years, while others thought I would drop off my perch aged either 86 or 88.
So far, so silly. I suppose the variations might possibly be explained by the use of different actuarial tables, as well as a range of approaches to such factors as my health, geographical location, social class/income and the age of my parents when they died.
But the real mistake is to try and represent longevity with a single number and then making that number the average – or rather the point at which I have a 50 per cent chance of being alive (or dead). In terms of long-term planning, it is crucial to know the likelihood that the client will live for a worryingly long time; say to age 95, 100 or even longer. If there is a fair chance I will hang on until I am 100 or later, then I want to make sure that I will have enough money to last that long. I certainly do not want to be in danger of running out of cash at my so-called life expectancy of 88.
I would advocate getting an objective assessment of longevity for every client who is coming up to drawing pension benefits or in drawdown. We use an independent firm to do this for us called Morgan Ash, which is a specialist provider of health and underwriting services for financial service companies.
Its aim is not to predict how long a person will live but to provide an estimate to help clients and their advisers make rational choices for their financial planning. I have done one of these assessments myself and would recommend every adviser do one too. It certainly focuses you on the main issues.
The process starts with a telephone interview with one of the company’s specialist nurses. Its underwriters assess the results. It then uses a range of data from the Office for National Statistics to model the “normal” life expectancy of the individual’s postcode area. This enables it to reflect the social, economic and geographic factors that affect the client’s longevity. It combines the underwriter’s evaluation of the client’s medical assessment to adjust the longevity estimate to reflect the client’s specific medical and lifestyle factors.
The graph below shows the results. The curved line on the graph indicates the average chances of my living to the predicted year. The vertical lines indicate a reasonable spread between the best and worst chances. While this is not definitive, 90 per cent of consumers would be expected to fall within the range shown.
So what’s the bottom line?
Morgan Ash believes I have a 66 per cent chance of reaching age 85, and a 9 per cent chance of becoming a centenarian. Even on the most optimistic view it does not rate my chances of making it to age 109. Well, we will see…
However, because it does not know everything about me or future medical advances and any other changes, there is an element of doubt about these figures. For example, it currently thinks my chance of living to age 85 is likely to be between 43 per cent and 71 per cent.
All of that is the basis for a really good discussion with a financial adviser. I think we should play safe and assume I could live to 105. But I also need to remember that I could be knocked off my bike next week. It is all a matter of risk and having a sensible approach to it.
Danby Bloch is chairman of Helm Godfrey