A survey conducted by the Canadian Institute of Actuaries (CIA) reveals that Canadians underestimate their life expectancy by almost four years. That’s a huge gap if you’re trying to guess how much you can sustainably spend in retirement.

On average, Canadians aged fifty (the average survey age) expect to live to nearly 83. However, the CIA estimates life expectancy to be nearly 87 years, including provisions for future mortality improvements. The survey also found that women underestimate their life expectancy by a greater amount than men.

CONTEXT ON LIFE EXPECTANCY AT BIRTH

Life expectancy numbers you see reported in the media likely refer to life expectancy at birth, a statistic that’s not particularly relevant for retirement planning.

Consider that life expectancy at birth in England and Wales during the Victorian era was about forty years. Many people misinterpret this statistic to mean that people had short life spans. However, life expectancy at birth at that time was skewed dramatically lower by high infant and child mortality rates. Future life expectancy at age ten was significantly higher than life expectancy at birth. In fact, if a person born in the mid-1800s survived childhood, they could expect to live into their sixties and beyond.

Fortunately, child mortality rates are much lower today. A newborn in Canada has a greater than 99% chance of surviving to age five and a 90% chance of making it to age 65. But those pre-retirement mortality rates are still large enough to render life expectancy at birth a misleading statistic for estimating longevity at retirement. The reality is, surviving to age 65 adds up to three years to a person’s total life expectancy from birth.

STATISTICS REPRESENT THE AVERAGE

Mortality rates are correlated with education and wealth. There are a variety of reasons for this relationship. Statistically speaking, an educated population tends to be more health conscious, with lower rates of smoking and drug abuse, and higher rates of exercise and healthy eating. Educated people also tend to work in offices, insulated from harsh physical conditions and the hazards of shift work. National statistics covering the entire population are another reason why media reports likely provide an unreliable estimate of your life expectancy.

THINKING IN TERMS OF PROBABILITIES

When it comes to retirement planning you should think probabilistically instead of just relying on estimates of life expectancy.

Using a mortality table based on Canadian pension plan data (a proxy for healthy lives), a 65-year-old woman has a future life expectancy of 24.9 years for a total life expectancy of 89.9 years. But this single number doesn’t describe the range and associated likelihood of potential outcomes. The table below has an advantage over mere life expectancy because it illustrates the likelihood of surviving to advanced ages.

_{Source: QV Investors, Canadian Institute of Actuaries}

To be conservative, a healthy 65-year-old woman may want to budget to the 90th percentile of her longevity distribution, which means considering the possibility of living to 100.

HOW TO MANAGE LONGEVITY UNCERTAINTY

There are several ways you can manage longevity uncertainty. The first step is to prepare a financial plan that directly examines the financial implications of a long life. Perhaps you discover that even if you live to 100 you will still have plenty of wealth to spare. If so, you might not need to take additional steps to manage your retirement income security.

But if the potential for a long life presents a financial challenge, the sooner you figure that out the better. You might need to adjust your plan by working longer or spending less. Another option is to annuitize a greater portion of your wealth. As we discussed in this article, delaying CPP and OAS can be cost-effective ways to reduce retirement risk by generating lifetime inflation-protected income on attractive terms.

QV can help you assess your circumstances and prepare for the future. Contact your Investment Counsellor to start the discussion.