In a recent Toronto Star article, financial journalist James Daw linked to our life expectancy calculator. In the article, and almost incidentally, he made a very important clarification on using these mortality calculators as a planning tool.
Consumers would use a tool like this as part of their financial planning, perhaps to determine how long they need their retirement savings to last. They may put in their current age and assume the resulting ‘average life expectancy age’ is a good number to target as an endpoint for their. For example, our calculator shows that a 50 year old Male resident of Ontario has an average life expectancy to age 81. So we would naturally assume that we should plan our savings for roughly another 31 years if we were 50 today.
But that leaves out two very important pieces of information that are relevant to estimating how long you need your savings to last. First and most importantly the average life expectancy does not mean that most 50 year olds are going to live until age 81 and then pass away. It actually means that about half of these folks will predecease age 81….and about half will life past age 81. And it’s that second half that you should be concerned about with your planning. It’s not just planning for for another 31 years, it’s planning that you have about a 50% chance of living past age 81. That means you shouldn’t be planning for living to age 81, you should be planning on the fact that you have a very good chance of living well past age 81, and planning your retirement funding for much longer than 31 years.
There are two very simple factors you have in planning your retirement income. The first one is time. Time is like holding a long stick out at the end of our arm. If you wiggle the stick a little bit at your end, the end of the stick wiggles a lot. Small changes at the front end translate into huge changes at the other end. And that’s how time impacts your retirement planning. You need to start now, with as much as you can. Every dollar you start saving today will have a huge impact on your available income 30 years from now. If you wait another year to start saving seriously, you’ve just made that stick shorter, and those savings will have a smaller impact later in life. So start saving now
The second simple factor you have available to you is rate of return. Again, a small change in interest earned on your savings will have a dramatic impact on your ultimate income later in life. And while we don’t have complete control over your gross investment earnings (i.e. we don’t control interest rates) we do have an extremely easy way to change our interest earned. It’s as simple as cutting costs – costs that are typically a percentage of our portfolio. These investment costs are called MER’s. If you earn 6% interest and your MER (charged by your investment advisor) is 2%, then you actually only earned 4%. If you earn 6% and your MER is only 0.5%, then you actually earned 5.5%. You just earned an extra 1.5% interest on your savings! And that small amount of earnings can have a huge impact on your investments over time. If that’s not entirely clear, then flip the approach on it’s head and think about how hard you would shop to save an extra 1.5% interest on your mortgage. That’s the amount of effort you should put into saving on MER’s in your retirement savings.
Back to the calculator, The second thing that’s frequently overlooked has to do how the mortality tables are calculated. The life expectancy calculator for a male age 50 shows age 81. But there’s a piece of information that is assumed in the calculations that isn’t apparent to consumers. The life expectancy of a 50 year old is age 81 – give that the individual has already survived to age 50. This means that the longer you live, the longer you can expect to live (within limits). Here’s how you can see this in action. The life expectancy for a male age 50 in Ontario is age 81. However the life expectancy of someone aged 81 however (using the additional information that they have already survived to age 81) is actually age 89. So if you’re that 50 year old and you make the 50% of people that live to age 81, then at that time the numbers say you now have a 50% chance of living past age 89.
This should be worrisome in terms of your retirement savings. As noted above, you should be starting to save now, as much as you can as early as you can and you should be trying to cut your MER’s however you can.
For completeness, I’m going to touch on a counterpoint to this line of reasoning. Some people believe that the financial industry is scaring consumers into over estimating the need for retirement savings. To be clear, I disagree. While the financial industry has a strong bias to scare the bejeepers out of you and get you saving gobs of cash right away, the basic premise that you should be saving gobs of cash right away is I believe sound. The reason for the discrepancy in outcomes has to do with assumptions on the amount of money needed to live on during retirement and the duration that money is needed. To be fair, if you have a solid defined benefit pension plan then you may have the wherewithal to make your income last as long as needed without worry. But for those without that security, you should give some thought to both sides of the argument, but be cautious. The downside of getting this wrong is catastrophic.
About our life expectancy calculator
We created our life expectancy calculator with the assistance of an actuary. The calculator matches the sample calculations provided on the website of the Society of Actuaries, and in fact we worked with the actuary who created the life expectancy spreadsheet offered by the Society on their website.
The data we sourced from a variety of sources. Current mortality data we used from readily available government and other public sources. Data from older mortality tables came from our own sources. Through our work scanning antique financial books we have access to printed Canadian mortality tables going back to 1801. We manually entered in data from 100+ year old mortality books for use in the older dates. We believe this is the only place this Canadian mortality data is publicly available and are quite happy to make it available publicly through the calculator.
As noted above our Canadian life expectancy/mortality calculator provides your average life expectancy given that you have survived to a specific age.
And finally, we’re not even kidding when we say that you should use the calculator for entertainment purposes only. We created the calculator specifically for that purpose – so we could say “Neato – look how long we would’ve lived if today was 1801 instead of 2013!”. And while the calculations and data we use is very real, the resulting calculations are nowhere near rigourous enough to be used in real world situations.