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# End Game

Dennis Ho

WHENEVER I TELL people I’m an actuary, I often get the same response: “So you’re the guy who can tell me when I’ll die.” It was funny the first couple of times I heard it, but less so a few dozen occasions later.

Still, the comment is a good reminder of a key statistics principle: Probabilities work well for large groups, but are less useful for smaller sample sizes. Statistics help actuaries predict the number of deaths for a large population. But it’s virtually impossible to predict which specific individuals will die.

Why is this relevant to personal finance? The principle also extends to one of the key inputs that drives our financial planning: expected lifespan. When projecting retirement income needs, I’ve often seen people simply plan for a 20-year time frame, because a healthy 65-year-old has a median life expectancy of about 20 years.

Problem is, there’s the potential to live much longer, particularly if you’re a healthy woman. According to the Social Security Administration, a healthy 65-year-old woman today has a 20% chance of living past age 95 and a 6% chance of living past 100. And if you’re planning for a couple, the probabilities that one person lives to these ages is even higher.

As someone who’s been around probabilities my entire working life, these numbers sound pretty high. How many people would fly if every plane had a 6% chance of crashing? In retirement, you have just one chance to be successful. How do you plan for this uncertainty, while still being able to enjoy your retirement savings in the meantime?

To be clear, I’m not saying ignore median life expectancies. They’re a great starting point for planning. But also consider incorporating the following notions:

Identify the extreme scenarios. When there’s uncertainty, it’s always important to look beyond expected results and review multiple scenarios, including extreme situations. In the case of longevity, ponder scenarios where you live to age 90 or 100, and perhaps even 110.

Quantify your exposures. Assuming you were to live to 90 or 105, how would you fund your living expenses? Would you be financially ruined or would your current plan get you through? Are there risks that you can’t control—such as stock market returns or health care expenses—that could impact your ability to cope with these scenarios?

I wouldn’t try to model things down to the penny. But having a general sense of which scenarios hurt you, and which you can ignore, is helpful for the next step of our process. For example, you might realize you’re in pretty good shape even if you live to 95, but living to 100 or beyond could be a big problem.

Reduce your risk. Once you’ve identified the scenarios you’re concerned about, don’t just accept them and hope for the best. While it may not be practical to eliminate all the risks associated with the extreme scenarios, there may be ways to reduce those risks to a point you’re comfortable with.

For instance, if your concern is living past 90, you might modestly increase your stock allocation to increase your portfolio’s expected return, delay Social Security to increase future income and decrease current spending to make your money last longer. All these things would reduce the financial impact of living beyond 90 without materially hurting your quality of life today.

Other options including delaying retirement a few years or working a part-time job after retirement. Yet another strategy might be to buy a deeply deferred annuity that doesn’t start payments until age 90. A 65-year-old man investing \$100,000 today could receive approximately \$65,000 of annual income for life starting at age 90. The guaranteed income might not cover all your spending needs at 90. But it might be enough of a floor on your income to give you comfort that, if you did indeed live that long, you’d be able to handle the financial burden.

Dennis Ho is a life actuary and chief executive of Saturday Insurance, a digital insurance advisor that helps people shop for income annuities, long-term-care insurance and other insurance products. Prior to co-founding Saturday, Dennis spent 20 years in the insurance industry in a variety of actuarial, finance and business roles. His previous articles were Policy DecisionsWorks If You Can’t and Bet Your Life. Dennis can be reached via LinkedIn or at dennis@saturdayinsurance.com.

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Luke Barney
4 years ago

Thank you Dennis. Good stuff. I am curious what would be the advantage/disadvantage to using a “deeply deferred annuity” versus using a QLAC?

Dennis Ho
4 years ago
Reply to  Luke Barney

Hi @luke_barney:disqus – thanks for the comment. A QLAC is a special subset of deferred annuities but they all work the same. Pay money to an insurer upfront and receive guaranteed income starting sometime in the future. “Deeply deferred annuity” was just my (unscientific) name for any deferred income annuity delayed 20+ years. A QLAC is a deferred income annuity that is funded with retirement assets. By designating the annuity a QLAC, the IRS allows you to exclude the QLAC value from your annual required minimum distributions, so you get to defer taxes on the QLAC funds a little longer.

You could have a deeply deferred annuity that’s also classified as a QLAC, though QLAC payments must start by age 85 at the latest. If this doesn’t make sense or you have further questions, feel free to email me at dennis@saturdayinsurance.com. I’m a fan of QLACs and could talk about them all day!

wtfwjtd
4 years ago

This is good information, well-presented. It highlights one of the biggest risks of retirement–not dying, but living (too long). And, the earlier one’s retirement commences, the greater this risk becomes. It’s one of the prime reasons to delay drawing Social Security for as long as possible, to maximize its insurance component of helping to protect us as much as possible from this risk.