Life expectancy continues to rise, with no sign that it will slow down anytime soon. Is planning to the average, even with a buffer, sufficient planning for our clients? Steph Willcox, Head Actuary at Dynamic Planner says we need to build plans to help clients live the life they might actually live, not the one that statistics suggest.
Ask most people how long they think they’ll live, and they’ll shrug and say, “about average, I suppose”. It’s an entirely reasonable answer.
But when that same logic creeps into a cash flow model – when we set a plan end date of, say, 85 or 87, or even life expectancy plus five years, and then treat that as job done – we’ve potentially built a very expensive assumption into the heart of a client’s retirement plan.
This matters more than ever now that the ONS has updated its life expectancy calculator, giving advisers and paraplanners a quick, accessible tool to show clients what the data actually says about how long they might live.
The headline numbers may surprise you, and they should certainly give you pause for thought before you anchor a plan to an average.
The problem with planning to the average
Average life expectancy is, by definition, a midpoint. When you’re using a life expectancy calculator, half of the time you would expect your client to pass before their average life expectancy, and half of the time you expect your client to live beyond this age.
When we plan to the average, we are, statistically speaking, building a plan that runs out of money for around half of our clients.
That is not a comfortable position to be in, and it is certainly not consistent with the spirit of Consumer Duty.
Adding a buffer helps, of course. Planning to life expectancy plus five or ten years is better than planning to the average.
But it still misses the point. Longevity risk isn’t just about the average outcome – it’s about the tail. It’s about the client who does reach 95, 100, or beyond, and who needs their plan to still be working for them at that point.
Enter Sir David Attenborough
Sir David Attenborough turned 100 just a few weeks ago – still one of Britain’s most recognisable voices, still celebrated, still inspiring millions and still working!
If a financial planner had sat down with David at age 60 in the mid-1980s and built a retirement cash flow to his then life expectancy of around 75, that plan would have run dry decades ago. Even planning to 85, or 90, would have left him facing a significant funding gap.
Now, David Attenborough is an exceptional case but that is precisely the point; exceptional cases happen.
And the longer someone lives into retirement, the more vulnerable they become to running short, because inflation has had more time to erode purchasing power, care costs may have escalated, and the portfolio has had less time to recover from any investment shocks along the way.
What the ONS calculator actually tells us
The ONS life expectancy calculator uses cohort life expectancy, which is more meaningful for financial planning than the period measure you will often see quoted.
Cohort life expectancy accounts for the fact that mortality rates are projected to continue improving over time, meaning today’s 65-year-old is likely to live longer than historical death rates alone would suggest.
Crucially, the calculator also shows the probability of surviving to age 100. For a 65-year-old woman today, that probability is not negligible – and for couples, the chance that at least one partner reaches very advanced age is higher still.
When you frame it that way in a client meeting, the conversation about planning to 100 or beyond stops feeling over-cautious and starts feeling like basic prudence.
The calculator is freely available and simple enough to share with clients directly, making it a genuinely useful tool for those conversations.
Pointing a client to the ONS data, rather than relying on a rule of thumb, anchors the discussion in evidence and helps explain why the plan extends further than they might have expected.
What should we be doing instead?
There is no single right answer, but there are better questions to be asking:
- What is the probability of this client surviving beyond the plan end date? If the answer is more than ten or fifteen percent, that should prompt a conversation.
- What is my client’s attitude towards risk? Longevity risk is different to investment risk but the outcome of taking too much risk may be very similar. A risk-averse client is likely going to want to plan to a much higher age “just in case”.
- What happens to the plan if they do live longer? Stress testing to age 100 or beyond should be standard, not optional.
- Is there any guaranteed income underpinning the plan? A lifetime annuity or defined benefit pension that covers core expenditure removes much of the longevity risk from the drawdown pot entirely.
- Have we planned for the cost of care? For clients in advanced old age, care costs can dwarf all other expenditure. A plan that runs to 90 and ignores potential care needs may be giving a false sense of security.
The finishing line keeps moving
Life expectancy has been rising for generations, even if the rate of improvement has reduced, and there is no strong reason to assume that trend will stop.
The clients sitting in front of us today are likely to live longer than any previous generation. The tools available to us – including the ONS calculator – make it easier than ever to have an evidence-based conversation about that reality.
Planning to the average, or even the average plus a buffer, is not sufficient. It sets a finishing line that, for a significant proportion of clients, will come too early.
Our job is to help clients plan for the life they might actually live – not just the one the statistics suggest is most likely.
Sir David Attenborough just turned 100. Our clients deserve a plan that keeps pace.
Main image: finish line, david-griffiths-bssA-XRpH3s-unsplash
