Will You Live to 100?

If you want to see how long — on average — you can expect to live you need only to consult standard actuarial tables.  But if you undertake your retirement planning based upon an average lifespan, you have a 50 percent chance of outliving your planning. Moreover, we all generally underestimate how long we will live by a lot (more here). Indeed, this year’s Risks and Process of Retirement Survey from the Society of Actuaries again shows that many people have a much shorter planning horizon than their future expected lifespan.

According to the Society of Actuaries, 30 percent of all American women and almost 20 percent of American men age 65 can expect to reach 90 years old. In Britain, the Department for Work and Pensions has released a report detailing life expectancy and comparing the generations at 20, 50 and 80 years old. The data sees 20-year-olds as being three times more likely to reach 100 than their grandparents, and twice as likely as their parents. Even so, a girl born in 2011 has a one-in-three chance of living to her 100th birthday while a boy has “only” a one-in-four chance.  Compared to a baby born in 1931, today’s children are almost eight times more likely to become centenarians. An easy tool to see your own likelihood of reaching 100 using this data is available here; it says that I have a 10.5 percent chance of reaching 100.  I’m not sure if that’s good news or not.

Actuaries in the United Kingdom are now pricing longevity risk in insurance contracts using age 125, and those in the U.S. are using age 120. Thus for anyone thinking s/he might not need to plan beyond age 90 or even 100, the key take-away is that “tail risk” is substantial – that is, the risk of living well beyond one’s life expectancy, into old old age.

According to Danish researchers, if the pace of increase in life expectancy in developed countries over the past two centuries continues through the 21st century, most babies born since 2000 in France, Germany, Italy, the UK, the USA, Canada, Japan, and other countries with long life expectancies will celebrate their 100th birthdays. Although trends differ between countries, populations of nearly all such countries are aging as a result of low fertility, low immigration, and long lives. A key question is: are increases in life expectancy accompanied by a concurrent postponement of functional limitations and disability? The answer is still open, but research suggests that aging processes are modifiable and that people are living longer without severe disability. This finding, together with technological and medical development and redistribution of work, will be important for our chances to meet the challenges of aging populations.

The analysis of data by these same Danes from more than 30 developed countries reveals that death rates among people older than 80 are still falling. In 1950, the likelihood of survival from age 80-90 was 15-16% for women and 12% for men, compared with 37% and 25%, respectively, in 2002. “The linear increase in record life expectancy for more than 165 years does not suggest a looming limit to human lifespan. If life expectancy were approaching a limit, some deceleration of progress would probably occur. Continued progress in the longest living populations suggests that we are not close to a limit, and further rise in life expectancy seems likely,” Kaare Christensen, of the Danish Aging Research Center at the University of Southern Denmark, and colleagues wrote.

If you want to look at your own life expectancy using more variables than just age and sex, a number of tools exist for doing so.  Examples follow.

Northwestern Mutual Life’s Lifespan Calculator
Northwestern Mutual Longevity Game
Vanguard Longevity Calculator
Wharton Life Calculator

So how many of us will actually live to age 100? Whatever the number, it’s almost surely higher than we think and, obviously, that has serious implications for retirement planning.

“Except for health coverage, insurance products such as annuities and long-term care insurance are not seen as major components of retirement planning,” said actuary and retirement expert Anna Rappaport just last week.  Rappaport serves as chair of the Society of Actuaries’ Committee on Post-Retirement Needs and Risks. “As a result, many retirees continue to be at risk of running out of assets and having to rely solely on Social Security,” she said

As Seneca pointed out over two centuries ago, “Our minds should be sent forward in advance to meet all the problems, and we should consider not what is wont to happen, but what can happen.”

How prepared are you for what can happen?

Open Questions re the Longevity Crisis

I wrote earlier today about yesterday’s new report from the Census Bureau about the explosive growth seen in the number of people aged 90 and above in the United States.  There has been a fair amount of conjecture over the past several months about what demographic change will mean for the markets, but there is nothing like consensus on the subject. 

According to researchers from the Federal Reserve Bank of San Francisco, historical data indicate a strong relationship between the age distribution of the U.S. population and stock market performance. Obviously, the aging of the baby boom generation is a key demographic trend. As they reach retirement age, they may shift from buying stocks to selling their equity holdings to finance retirement. Statistical models described in the report suggest that this shift could be a factor holding down equity valuations over the next two decades. Rob Arnott describes the “3-D” risks (debt, deficits and demographics) very well here

On the other hand, Wharton’s Jeremy Siegel, author of Stocks for the Long Run, says that growth in developing countries should generate enough demand to absorb a baby-boomer selloff and “keep stock prices high.”  A Congressional Budget Office background paper published in 2009 supports Siegel’s view, arguing that Boomers won’t sell assets very rapidly to finance retirement on account of several factors.

  1. Boomers will be careful — they are concerned that they might live longer than expected or might face higher than anticipated medical costs.
  2. Boomers desire to transfer assets to the next generation, which should also blunt asset sales.
  3. Since the wealthiest one percent of Americans own about one-third of the nation’s financial assets and, for the most part, the very wealthy don’t sell assets to finance retirement, this asset concentration will help to keep demand steady.
  4. Many Boomers may work longer than they otherwise would have due to losses of retirement assets due to the 2008-09 financial crisis (but the empirical evidence on this point is inconclusive and the impact might be small).

The CBO conclusion:

“Although the retirement of the baby boomers is not likely to cause a large decline in aggregate demand for assets, several economic studies suggest that the retirement and aging of baby boomers could cause a temporary decrease in asset prices. … Empirical evidence, however, has not revealed much connection between demographic trends and the changes observed in financial markets.”

Moreover, some observers have questioned whether longevity will continue to increase in this country at historical rates on account of the <pun warning> expanding obesity problem. Life expectancy growth overall may mask wide local disparities, according to a recent study. Men in Holmes County, Mississippi, for example, have a life expectancy of 65.9 years, the same as men in Pakistan and 15.2 years behind men in Fairfax, Virginia. Gaps between America’s counties have widened since the early 1980s. Most alarming, 702 counties, or 30% of those studied, saw a statistically significant decline in life expectancy for women from 2000 to 2007; 251 counties saw a statistically significant decline for men.

Moreover, America’s advances on the national level have lagged behind those of other developed countries. A panel at the National Research Council recently reported that for American women, a rise in life expectancy of 3.3 years from 1980 to 2007 amounted to just 60% of the gains in other rich countries.  The question is why these trends have developed.  Some have suggested that obesity is capping life expectancies.  For example, this paper contends that obesity threatens progress in life expectancy. However, Australia has bulging waistlines much like America and its life expectancies continue to grow nicely. 

Since we know that U.S. lifespans have been limited by smoking and that tobacco use has been reduced dramatically, it is unclear whether these life expectancy disparities will continue going forward.  James Vaupel, director of Duke University’s Population Research Institute, is skeptical of the argument that obesity may reverse future progress in life expectancy. More worrying, he says, is that rising obesity will lead to higher levels of disability.

Accordingly, further study will be needed to ascertain what the markets will look like as the American population ages and even the extent to which longevity will continue to increase.  Open questions remain.

The Longevity Crisis

As the old bluegrass song goes, “everybody wants to go to heaven but nobody wants to die” (listen to the wonderful Alison Kraus version of it here).  Today and looking ahead, more and more people will be getting their wishes granted.

The nation’s 90-and-older population nearly tripled over the past three decades, according to a report released yesterday by the U.S. Census Bureau and supported by the National Institute on Aging. Over the next four decades, this population is projected to more than quadruple. 

In real numbers, that means that there are roughly two million Americans at least 90 years old today and there are likely to be about eight million people in the 90-plus category by 2050.  In percentage terms, people 90 and older now comprise 4.7 percent of the older population (age 65 and older), as compared with only 2.8 percent in 1980 and by mid-century 20 percent of the total population of the United States will be at least 65 and one in 10 of those people will be at least 90.

In its first-ever report on nonagenarians, the Census Bureau says that this group is the fastest growing segment of the population.  Therefore, the Bureau has had to change its process and revise its findings because the “oldest old” used to be 85.

A majority of this group reports having one or more disabilities, living alone or in a nursing home. People in this age group are also more likely to be women and to have higher widowhood, poverty and disability rates than people just under this age cutoff.

An older person’s likelihood of living in a nursing home increases sharply with age. While about only 1 percent of people in their upper 60s and 3 percent in their upper 70s were nursing home residents, the proportion rose to about 20 percent for those in their lower 90s, more than 30 percent for people in their upper 90s, and nearly 40 percent for centenarians.

The annual median personal income for people 90 and up as reported in the study was $14,760. Almost half (47.9 percent) of this amount came from Social Security and another 18.3 percent came from retirement pension income. 14.5 percent of people 90 and older live in poverty, a much higher rate than for those 65-89 (9.6 percent).

Among the 90-and-older population, women outnumber men by nearly 3 to 1. That means that while there are roughly 38 men for every 100 women ages 90 to 94, that ratio drops to 26 for ages 95 to 99 and to 24 for those 100 and older. More than 80 percent of women 90 and older are widowed, while more than 40 percent of men this age are married.

These older women bear a particular burden.   Less than one-third of women in this age group live in a household with family members and/or unrelated individuals, four in 10 live alone, and another quarter are in institutionalized living arrangements.

At the risk of sounding like a broken record, the implications of and the lessons from this study should be obvious.

  • Social Security and Medicare will be expected to do a lot more going forward.  Their fiscal soundness is imperative.
  • The need for sustainable income that cannot be outlived to supplement Social Security and private pensions is vital.
  • So is long-term care insurance or an insurance “hybrid” product (life insurance or annuity) that offers long-term care benefits.
  • Women are particularly at risk in this area.  Since married men tend (a) to make most of the financial decisions, (b) to be much more willing to take financial risks and avoid insured solutions, (c) to be cared for by their wives when disabled, and (d) to die first, that means they are doing their wives a major disservice by not providing adequate income and LTC protection.

Every year the Los Angeles Department of Recreation and Parks throws a big birthday bash for its oldest residents — those 90 and up.  This week’s bash hosted hundreds of them — mostly women.  The Department will likely need to keep looking for bigger rooms to hold this party for the foreseeable future.

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Update:  A follow-up to this post is available here.

White’s Wrongs

Jane White has written a piece at Huffington Post that is about as ignorant, deceptive and misguided as one could imagine.  Essentially, White claims that all annuities are “the biggest financial rip-off on the planet” and that the government’s effort to make income annuities available via defined contribution plans is foolhardy.

There is so much stupid in White’s article that it’s hard to know where to begin.  But here goes anyway (White’s words quoted and in italics).

“Why are annuities toxic? As an annuity owner you’re not only paying a fortune for an investment product that can’t fill an empty nest egg but you’ll likely be charged huge penalties if you move your money out of one and if you die there’s a good chance the insurance company is the beneficiary, not your spouse. The losers are the surviving spouses who will no longer be able to access the annuity to pay expenses, despite the fact that that’s the point of buying one in the first place.”

White badly misunderstands what the government would like to accomplish here and confuses deferred annuities with immediate (income) annuities.  As Treasury’s Mark Iwry said (as one example among many), “There’s been a fair amount of discussion in the literature taking the view that perhaps there ought to be more lifetime income.”  That view is consistent with a paper he co-authored for The Brookings Institution (“This paper proposes a policy that would increase the role of lifetime income products in future retirees’ overall retirement planning”).  See also Live Q&A Session with Labor Secretary Solis (December 7, 2009). 

Accordingly, the goal is in no way to pitch deferred annuities during the time when people are saving for retirement.  Instead, consistent with mainstream (and virtually unanimous) scholarly opinion, the goal is sustainable income streams throughout retirement – income annuities.  Income annuities are simple and non-controversial products that provide a guaranteed stream of income that a retiree cannot outlive.  The societal need for sustainable income is exacerbated by the ongoing disappearance of defined benefit plans that produce pension income in retirement.  Moreover, income annuities don’t sell well even though they should (economists call this disconnect between what ought to happen and what happens the “annuity puzzle”), in large part because they don’t pay the advisor very much to sell them.

“How did this come to pass? Amazingly, all of the comments Treasury received on its proposal were favorable because they must have come from the insurance industry or the agents that generate commissions from selling their products.”

Had she bothered to do even a bit of research, White would have discovered that positive comments are to be expected because unbiased, scholarly opinion is essentially unanimous in supporting the benefits of income annuities.  Representative examples — from prominent academics who are hardly insurance agents seeking commissions — follow.

  • “Lifetime income [products] may not be the perfect financial instrument for retirement, but… they dominate anything else for most situations.”  Babbel, “Lifetime Income for Women: A Financial Economist’s Perspective,” Wharton Financial Institutions Center (August 2008).
  • “To achieve a similar riskless guarantee of income throughout one’s uncertain lifetime without life annuities would cost between 25% and 40% more.”  Babbel & Merrill, “Rational Decumulation,” Wharton Financial Institutions Center (May 2007).
  • “[T]he market for privately purchased individual [income] annuities in the United States is very small,” which represents a “remarkable disconnect between theory and practice” because income “annuities ought to play an important role in the portfolios of elderly households.”  Brown, “Life Annuities and Uncertain Lifetimes” National Bureau of Economic Research, NBER Reporter (Spring 2004).
  • “Lifetime income annuities may not be the perfect financial instrument for retirement, but when compared under the rigorous analytical apparatus of economic science to other available choices for retirement income, where risks and returns are carefully balanced, they dominate anything else for most situations. When supplemented with fixed income investments and equities, it is the best way we have now to provide for retirement. There is no other way to do this without spending much more money, or incurring a whole lot more risk coupled with some very good luck.”  Babbel, “Lifetime Income for Women: A Financial Economist’s Perspective,” Wharton Financial Institutions Center (August 12, 2008).
  • “For all time periods and for all portfolios, the addition of the annuity leads to a decline in the portfolio failure rates.”  Ameriks, Veres & Warshawsky, “Making Retirement Income Last a Lifetime,” Journal of Financial Planning (December 2001).
  • “If…the Social Security program will not generate sufficient income to satisfy minimal consumption needs, then it should be supplemented with the purchase of high-grade private annuities.”  Babbel & Merrill, “Rational Decumulation,” Wharton Financial Institutions Center (May 2007).
  • “Without additional guaranteed lifetime income streams…, middle-income Americans are at high risk of outliving their financial assets and living their final years in poverty.”  Ernst & Young, “Retirement Vulnerability of New Retirees,” Americans for Secure Retirement (June 2009).
  • “I have reviewed over 70 academic studies that have appeared since 1999, analyzing lifetime income annuities vs. other alternatives, and coauthored another major study. …The consensus of the literature from professional economists is that lifetime income annuities should definitely play a substantial role in the retirement arrangements of most people. How great a role depends on a number of factors, but it is fair to say that for most people, lifetime income annuities should comprise from 40% to 80% of their retirement assets under current pricing. Generally speaking, if a person has no bequest motive, or is averse to high risk, the portion of wealth allocated to annuities should be at the higher end of this range.” Babbel, “Lifetime Income for Women: A Financial Economist’s Perspective,” Wharton Financial Institutions Center (August 12, 2008).

When I emailed White for comment she declined except to rail against “academic nitwits”and “”consumer ripoffs.”  She also noted regulatory actions in several states but these were all against deferred (not income) annuities. No surprise there.

White is correct that most people have not saved enough for retirement.  It is also true that an income annuity cannot correct that problem.  However, while it is not the only tool worth considering and using, an income annuity is the best tool we have to provide sustainable retirement income that cannot be outlived.  For White to make the blatantly false claims she does is unconscionable.

Does Retiring Early Make Us Stupid?

As I have written elsewhere, it makes great financial sense to delay retirement so as to avoid having to begin taking Social Security benefits before age 70.  It turns out that delaying retirement may have other benefits as well.

Research by Susan Rohwedder and Robert Willis used a comparable international dataset on memory – essentially, people are asked to remember as many words as they can from a list of 10 for five minutes – and demonstrated that countries with higher percentages of early retirement see a faster decline in memory after retirement. Thus, early retirement has a significant negative impact on the cognitive ability of people in their early 60s that is both quantitatively important and causal.

In other words, retirement makes us stupider.

Mental Retirement

 

Worth Watching

Courtesy of the BBC, this is the newest version of Hans Rosling’s famous presentation on economic growth and life expectancy. It provides a wonderful visual reminder of why longevity risk is so crucial to financial planning (and is becoming even more so).  You may read more about it here.