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Alistair Cunningham: Mortality assumptions remain a sticking point for planners

I have been giving a lot of thought to assumptions. It is generally accepted they should be reasoned, reasonable and adequate, and it is preferable the client approves as well.

But being overly accurate or detailed with assumptions gives a perception that a plan is more determinate than reality.

If reality is more positive than the assumptions, it is hard to see much likelihood of complaint. So, as planners, our assumptions may tend to focus on the bad outcomes and their likelihood. This is only proper.

One of the biggest risks for clients is that assets run out in their lifetime, and it is this mortality assumption that I have struggled with. There is no shortage of data and opinion on the topic but we are led by our preconceptions more than anything else.

There are four approaches, each supported by behavioural biases, that I have observed and considered. Each is problematic in its own way.

The stubborn

Clients in this group have often seen one of their parents die young, or have experienced a health scare, either themselves or within their peer group.

I have one client who is convinced he will not make 75. He is currently in his 60s and was a distance runner up until about five years ago when he says his knees wore out. Both his parents died young but they were smokers. He refuses to accept he will live beyond this age and turns discussions on mortality into a joke: “I’ll fly to Switzerland first…”

The informed

Most of my 60-something clients have an awareness that the national average is the mid-80s. As I explain below, this is a slight underestimate, but at least we are in the same ballpark and they are willing to be educated.

The upper quartile

People seeking advice are self-selecting, right? If you are wealthy enough to need advice, you are probably not “average”. We serve a principally white-collar, south of England demographic, so I talk about the upper quartile.

A 65-year-old male has an average life expectancy of 86 but a one-in-four chance of making 94, according to the Office for National Statistics. For females, it is 89 and 96 respectively. To me, then, 94 and 96 is a good assumption.

The round number

But taking the above assumption and some basic maths, if we say our healthier, wealthier client has their average at 94 or 96, the chance of both in a couple dying before these ages is unlikely; the same probability of tossing two coins and both showing heads – one-in-four. So why don’t we just round up to 100?

But even though those figures make projections for the future, they cannot attempt to factor in the probability of leaps in medical technologies. The biggest cause of death in the over-65s is dementia, with ischaemic heart disease coming a close second. What if we find a cure for these? What if we “cure” aging altogether?

This is where our assumptions can start to lose credibility.

Our firm currently uses 100 and I am not sure that is quite “pessimistic” enough – but I balance it with the next logical step being 110.

That said, of all the assumptions we discuss, life expectancy is the most contentious. And while it is not desirable to run a plan so someone has £1 left in their pots at 100, I do think that to push to 110 will mean many discounting its credibility.

Nevertheless, if we spoke to many of our clients’ parents 35 years ago, they would probably not believe what today’s 90-year olds can achieve.

Alistair Cunningham is director of Wingate Financial Planning


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. Are you sure? If you’ve got a 1/4 chance of getting to 94 and 96 for M and F respectively you’ve got a 15/16 probability against both reaching those ages, 1/16 of them both making it and 9/16 of neither of them making it. The logic is right, there is an age that most will reach but currently it’s not 100 based on ONS. This is the problem that your article rightly highlights and as we don’t know either way it is highly symptomatic of the problem of replacing pooled risk with individual risk. But the genie has been out of the bottle on that one for a long time

    • Alistair Cunningham 18th June 2018 at 2:52 pm

      If it’s an average then it’s 50% likely to have been under, as over, achieved.
      If we assume that the healthier, wealthier client should treat their average as being in the top quartile then they are 50% likely to die sooner than average.
      Chance of both dying = 50% x 50% = 25%
      50% chance of either being alive
      25% chance of both being alive beyond that date
      It was beyond the scope of this piece, but the distribution isn’t normal, so a few other issues with this – but you get the gist!

      • I do indeed. Scratching my head considering whether that’s a good assumption. Maybe we should lobby for better life tables? State pension only; state pension and private pension; state pension, private pension and other assets. That might help illustrate the issue and see if there is a significant relationship between wealth and longevity.

        • Alistair Cunningham 20th June 2018 at 10:20 am

          Annuity providers think there’s sufficient correlation: the larger the pot, the worse the rate (even though cost per annuity should decrease as size increases)

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