Tuesday, November 29, 2011

Retirement and Life Expectancy

When one thinks about retirement, one cannot escape from the somewhat morbid discussion about life expectancy.  If I can break it down into simple non-statistical terms, life expectancy basically means the number of years one can expect to live up till (usually calculated at a certain age).  And of course, most of us will be aware that based on statistics, most females in most countries have longer life expectancy than males.  And in most developed countries, the life expectancy for males and females probably is around or moving towards the age of 80.

When Do You Want to Die?

So when thinking about the retirement age or retirement planning in general, it is inevitable that the question about life expectancy will come up.  Meet any financial planner or insurance agent and they will most probably bring up the issue of the "age that one is expected to die" .  Well, it is a valid question as many of the assumptions that are made will be based on the assumption of when you think you are going to die (okay, that sounds so blunt but it is the truth).

The problem with putting a pinpoint estimate on when you think you are going to die based on the statistical life expectancy is that you might over or under estimate how long you might live.  Life expectancy is calculated based on a statistical average.  And we learn in school that average basically means that the average person is expected to be around there but at the same time, there can be large variances.

So these large variances means that you can either die way before the average life expectancy or you could actually live a whole lot longer than what you previously expected.  When it comes to retirement planning, I guess most people often make the assumption that the average life expectancy is the year that they will DEFINITELY DIE.  But that is wrong and it is perhaps wise to cater for a bit more extra just in case you are not the average person.  What happens if you retire at age 65 and die at age 95 or 105?  Will you have enough retirement savings to last you till then if your initial planning assumption used was that you are expected to live until only 80?  Yes, I know that might be going a bit overboard to cater in for such large variances in retirement planning but wouldn't you want to err on the safe side if your current income allows you to set aside a little more for your retirement?

Of course, if you die much earlier before the retirement age, then this is not a problem that you will have to worry about.  Sorry for being so morbid but that is the truth.

But the main idea is this:  Life expectancy is just a statistical average.  When using it as a planning assumption for retirement planning, do remember that it is just an assumption. Life might not turn out the way you assume it is going to be and you might die much earlier or live much longer compared to the average person.


  1. That's why i believe you must continue to invest with an aim to leave behind a legacy for your next of kin/kins. And at the same time you have already prepared for "If Tomorrow Never Comes"(Book by the late Anthony Yeo). In this way it doesn't matter when and how you leave for good. You shall leave willingly and happily; knowing you have made provisions for everyone, including yourself.

  2. I like this post FF!

    For me, I am more into what if tomorrow never comes? It freaks me out when I see in the obituaries people who died at 55 or 65 years young...

    Since I can't control WHEN I will die, I focus on HOW I live my life :)

    (Yes, insurance agents don't like me - they talk numbers and tomorrow; I talk philosophy and today)

  3. The reality is that the so-called financial plan has to be reviewed periodically on a consistent basis. Furthermore, the other problems in a financial plan are incorrect assumptions of shorter life expectancy and unrealistic rate of inflation. No kidding because I have personally come across such real life cases. Just my 2 cents' worth.

  4. It is indeed morbid to think about death, and most people would avoid talking or thinking about it, and therefore, put off retirement planning altogether. Just work and work, and think about work only. When that day come, just go. Perhaps this is a good attitude for simple living.

  5. Thanks for all the comments. Agree that it is morbid to think about death. And it is also true that a financial plan has to be reviewed periodically to see whether one is on target to reaching your retirement or savings goal.


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