25 July 2019

The flaws of averages

Putting a man on the surface of the moon must rank as one of the stellar achievements of the 20th century; even more impressive is the extension of human lifespan during this period.

At the start of the 20th century, UK life expectancy was a mere 45 years for men and 49 years for women. By the end of the century, life expectancy was 75 years for men and 80 for women1.

Since then, life expectancy has continued to rise alongside medical advances and improvements to the standard of living. A longer life expectancy is good news, but it has a significant impact on retirement advice.

‘All that glitters is not gold’

Longevity is perhaps the most difficult part of the retirement puzzle for both advisers and clients for the following reasons:

  • The flaw of averages - People often confuse averages with probabilities and there are so many factors that could have an impact on someone’s lifespan that it’s often difficult to know where to start. According to ONS data, the average life expectancy for a 65 year old man is 86, but he has a 1 in 4 chance of living to 94. For a 65 year old woman the average life expectancy is 89, but she has a 1 in 4 chance of living to 962. However, predicting the age that someone is going to live to is not quite as simple as that.

  • Socio economic groups  - Your client may not be reflective of the average UK population and these figures change by socio economic circumstances. A healthy 65 year old in a more advantaged socio economic circumstances has a life expectancy of 91 and a 1 in 4 chance of reaching 953.

  • Health is the greatest gift
    Unfortunately, many people will probably spend some of their retirement in poor health. The data reveals that generally, both sexes can expect to spend part of their years after age 65 in poorer health4. This means that patterns of expenditure are likely to alter during retirement, but how they will change is difficult to predict.  

Mitigating longevity risk

Now more than ever, advisers need to maintain close relationships with their clients throughout retirement. The notion of a ‘one and done’ solution is likely to prove ineffective in dealing with the twists and turns a longer retirement can bring.

Traditional life expectancy figures are not going to give you an accurate picture when planning a sustainable retirement income for your client. Even the most thorough of planning is not going to completely remove the risk of your client outliving their assets, particularly as there are so many factors at play.

One way to provide a greater balance of security, flexibility and control is to look at the way you can layer solutions together.

Selecting a guaranteed income to cover essential retirement spend can largely remove longevity risk, while allowing you to invest your clients' other assets with more flexibility. When planning a sustainable retirement income, it is clear that the value of sound, ongoing professional advice will become more and more important in helping clients achieve their objectives in retirement. 

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Our sources

1Century of change: Trends in UK statistics since 1900, Research paper 99/111 House of Commons, 1999.
2What are your chances of living to 100? Office for National Statistics.
3Our predicted view of the survival of a healthy 65 year old in a more advantaged socio economic circumstance.
4Healthy life expectancy at birth and age 65 by upper tier local authority and area deprivation: England, 2012 to 2014, Office for National Statistics, March 2016.