How long will I live? And will my money outlast me?
How long will I live for? For many cultures, long life is a gift, and something to be treasured and respected. But longevity can be bad news, especially if one is not adequately prepared for it financially, physically and mentally. Living in a highly urbanised country, with good healthcare, clean air and water will make for a long life. But this will also be an expensive life. While we cannot tell you how to prepare your body for the ardours of a long life, at the very least we can help with getting you set to have your money outlast your life!
The long road ahead of us
We are living longer than ever
With medical advances, life expectancy is getting longer than ever. Based on the 2019 Life Tables, men can expect to live to 83 years of age, and women for 88 years, from birth. But what matters more is how long we can expect to live in retirement, say from 65 years of age (after we have survived the riskier childhood and teen years). From the same 2019 Life Tables, men retiring at the age of 65 can expect to survive for a median of 20 years, and for women, 24 years.
But these retirement life expectancies are only medians for the entire population, healthy and unhealthy. So, there is a 50% chance that we will live longer than this, more so if we are healthy. And the chance that our money will not last that long increases as well. Which is why it is always safer to plan for a longer life, say to an age when we only have a 10% chance of attaining. For 65-year old retirees in 2019, that would be the age of 96 for the men, and 98 for the women.
These are some amazing numbers, a testament to our healthcare system and medical advancement. But they are also fairly scary numbers. Because it means that we need to plan for a 30 to 35 years retirement, and that is if you are retiring today. What if you are retiring only in 10 years time? or 20 years time? Wouldn’t you be likely to live even longer than that, and hence face even greater longevity risks?
Understanding life expectancy and future lifespans
How will we know how long we may live in retirement in the distant future? As mentioned, the Singapore Life Tables for 2019 are a good place to start. The Life Table looks something like this, giving us the mortality rate (i.e. probability of dying in a particular year given that you have survived until then), and the number of survivors out of 100,000 born in the same year:
Example of the Life Table for Males 2019
|Age (x)||Probability of dying between age x and x+1||Number of survivors at age x out of 100,000||Number of deaths between age x and x+1|
So if you are between 40 to 49 years of age today, more than 97.5% of the people born in the same year as you back in the 1980s are still alive today. To put this into context, the live births in the 1980s averaged around 40,000 a year, so it is likely that almost everybody you know from class in school is still around today. But these statistics get more interesting when we chart them, like what we do below:
Mortality Rate for Males 2019
The first thing which jumps out from this chart is how these mortality rates (the blue dots) follow some sort of exponential pattern (the red line). And secondly, how they stay low all the way through to your early 60’s and then start rising rapidly thereafter. The exponential pattern of life and death becomes even clearer when we look at them in natural logs:
Mortality Rate in Natural Logs for Males 2019
Here, it becomes clearer that the exponential pattern of life and death is pretty accurate from the age of 26 onwards, but less so in early childhood (infant deaths) and the teen years (all those hormones in puberty making us reckless). Strangely enough, the age of 12 seems pretty well behaved. Perhaps everyone is too busy studying for their PSLE to do anything dangerous outside of school and home?
In case you are wondering, this works quite well (but not as well) for the females as well:
Mortality Rate for Females 2019
Mortality Rate in Natural Logs for Females 2019
This exponential relationship is the Gompertz–Makeham law of mortality, which builds on the work of a John Graunt, who trawled cemeteries for the data to produce the first ever life table. So it appears that the question of “How long will I live?” is not about fate or karma, but is actually pretty well described by mathematics and statistics!
Life expectancy in the future
But while all this is well and good, it only describes life expectancy today, when more of the readers here are still in the prime of their lives and not retired yet. Can we somehow predict or forecast what life expectancy will be in the future, maybe 10 or 20 years down the road, when we are approaching 65, and preparing for retirement?
We can certainly give this a try. Since the mortality rates for the life table in 2019 can be described by a log-linear equation, we can also do this for every single year we have data for starting from 2003, and see how life expectancy has changed over time. In our simple model, we have:
Mortality Rate in Logs = A + B x Age
And what we want to see is how the constant A and coefficient B change over time.
Here’s what happened to the constant term A over the past 17 years:
Improvements in health and longevity over time – decrease in A over time
The constant A in our simplified Gompertz–Makeham model represents improvements or the lowering of the chance of death for everybody regardless of their age. And this has been improving continuously over the past 17 years, and we should expect it to continue to do so over the next 10 or 20 years as well.
On the other hand, the coefficient B represents the rate at which our chance of death increases from one year to the next, with every birthday we celebrate. And this has been increasing over time! Perhaps it is the higher incidence of cancer, and other lifestyle diseases like diabetes which make us fall off the cliff in terms of mortality much faster than we did in the past!
Worsening of mortality rates with age over time – increases in B over time
So, over the past 17 years, our health in general has gotten better, decreasing the risk of death at every single age But at the same time, our deterioration when we age has gotten worse. So which dominates? Fortunately for us, it is the improvements in health which dominate. We are still looking at longer and longer lives over time despite the rise in B. How does this then translate into a longer retirement? Using the parameters for A and B, which we have worked out above, we can project what the life table will look like in 2030 and in 2040. And from these projections, work out what retirement will look like if we turn 65 in 2030 or in 2040, compared to a 65-yer old person today.
Life expectancy in retirement – 2019, 2030 and 2040
|Retirement year when aged 65||Gender||You will expect to live up to this age||10% chance of living up to this age|
While all these projections need to be taken with a pinch of salt, what does stand out is that our life expectancy at the age of 65 increases by roughly 2 years for every ten years in the future. So someone who is 56 today, and expects to retire in 2030 can look forward to a retirement of 22 years for the men and 26 years for the women. And someone who is 45 today in 2021 can look forward to a long retirement of 24 years for a man and 28 years for a woman.
This is all very impressive, and means that we can look forward to being able to see how the scientific advancements we watched on TV in our youth become reality in our own lifetime! But it also means that the way we prepare and plan for our retirements is going to have to change. Right now, most of us may work on a 20-year retirement (which is really based on 2010 expected life spans), but we really need to start assuming that we may go on for up to 30 years in retirement.
Even if the median retiree lives only until 85 now for a man and 89 for a woman, we need to avoid the consequences of being the 50% of our cohort who live longer than the median, and hence we need to plan for outliving 90% of our peers to be really safe. What does all this imply for the way we look at retirement?
Some implication of longer lives
While a longer life can bring all sorts of opportunities, it brings many challenges as well:
Retirement age will be progressively raised
Longer lifespans either mean more financial resources will need to be accumulated for a longer retirement, or retirement needs to be shortened, or both. Raising the mandatory age of retirement, or even doing away with it is the main option taken in many places. It should not come as a surprise to the 46 year olds amongst us that their retirement age will be gradually but surely raised to 70 before they get to retire, maybe sometime in 2044?
Payouts on CPF Life and other pensions and annuities will be cut
Pension schemes and annuities like CPF Life will be need to pay less in order to remain solvent over a longer period of time. This will not be perceptible most of the time, because the CPF Full Retirement Sum will get progressively raised by around 3% a year, every single year, but with life spans going up by 2% a year, the payouts will remain stagnant at around current projected levels even as we stash away more into our Retirement Accounts.
Inflation will be a huge challenge to navigate in retirement
For many of us who invest to prepare for retirement rather than keeping our savings in bank deposits, the main reason for doing so is to beat inflation. this is somewhat mitigated while we are still working since we can look forward to promotions and salary raises to help us get even further ahead. But inflation does not stop upon our retirement, and may instead continue at a higher rate, due to healthcare costs. And without the promotions and salary raises to take the pressure off our retirement income streams, maintaining the standards of living we are accustomed to will be even harder.
This means that instead of moving investments into safer bonds and deposits during retirement, we may need to continue to invest aggressively in retirement, and without the fallback of a salary to get us through the inevitable downturns and falls in investment values. This also means that we should always, always choose inflation-adjusted options for our CPF Life and pensions and annuities, like the Escalating Plan for CPF Life.
Healthcare costs will go through the roof
As we all know by now, healthcare costs, whether it is the cost of hospitalisation, chronic illnesses, end-of-life care, insurance premiums etc. all keep rising at a rate faster than general inflation. And with longer life expectancy, this will become a bigger and bigger challenge. As we have seen elsewhere, our Medisave can only last so long before it runs out completely. Thereafter, everything will have to be paid in cash. And looking at how healthcare insurance premiums rise when we get to our 80’s and 90’s, the cash will run out pretty fast as well.
And that is not all. Research suggests that a major source of rising healthcare costs are the costs of chronic illnesses, and end-of-life care. Chronic illness, especially when they last throughout our long life spans, will be a big burden in the future, as they do not get fully covered under the usual hospitalisation and surgical insurance. But at least with longer life expectancy, there is less need to pay top dollar to prolong life since we will all reap the benefits of longer life already.
The 4 percent rule and Safe Withdrawal Rates needs to fall
Amongst the early retirement enthusiasts, the idea of the 4 percent rule for withdrawing from investments during retirement is popular. But remember, the 4 percent rule was formulated in an era (1990s) in the US where life expectancies were shorter (retirement was less than 20 years on average), and meant to be a safe rate of withdrawal for an unimaginably long retirement of 30 years. But with retirements of 30 years on average in the future, the 4 percent rule may be skating on thin ice! Perhaps it is time to reconsider the 3 percent rule instead?
Leaving a bequest for our heirs
Finally, while many among us are partial to the “tough love” school of thought, preferring to leave nothing to our heirs, the truth is that most of us will have some sort of bequest motive as we age. After all, what better way to be loved and bring joy than to spread some of our wealth around? But with longer lives, that is not going to be an easy decision to make, as much more of whatever wealth we may have accumulated will need to go towards living expenses over a long period.
And this definitely means that we should never, ever choose the plans in CPF Life which leave higher bequests (like the Basic Plan). Because we are simply going to outlive the periods when the bequests will be paid. So we end up worse off overall, making do with lower monthly payments, while leaving our heirs nothing. And current tools such as Term-to-99 insurance (discussed here and here) which can be used for making bequests will also become less useful if we live past the age of 99. So there is a need for innovation here for people who wish to make bequests.
How long will I live? The answer is, pretty long, and certainly longer than we would expect. Living longer can be a blessing, but it also brings about its challenges. Among these, we will need to rethink our planning for retirement as we live longer, in terms of retirement age, annuities, inflation, healthcare and bequests, to name a few goals for retirement. We cannot guarantee how the returns on our investments will turn out. Nor will we be 100% certain that our money can outlast us. All we can be certain of, is that we will be living longer.