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Retirement

Advisers warned on limitations with life expectancy estimates

  • December 08 2020
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Retirement

Advisers warned on limitations with life expectancy estimates

By Miranda Brownlee
December 08 2020

Jeremy Cooper has highlighted some of the limitations in using average life expectancies when planning retirement income for individual SMSF clients.

Advisers warned on limitations with life expectancy estimates

Advisers warned on limitations with life expectancy estimates

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  • December 08 2020
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Jeremy Cooper has highlighted some of the limitations in using average life expectancies when planning retirement income for individual SMSF clients.

Advisers warned on limitations with life expectancy estimates

Challenger chairman of retirement income Jeremy Cooper said that while the concept of average life expectancy and estimating what pool of retirement savings people require may be a useful tool for government or annuities providers when dealing with large pools of people, its usefulness for advisers becomes very limited when dealing with one or two clients due to the huge distribution.

“You can estimate quite accurately what the life expectancy of a very large number of people is going to be, even though there will be people who die at 70 or 80 or all the way through to over a hundred,” he said, speaking in an SMSF Adviser podcast. 

“[However], super is essentially individualised, and we’re taking that pooled number into an adviser’s office, and there might be one or two people sitting opposite and we’re using that pooled number to try and inform a couple, which is your typical SMSF, and saying your life expectancies are 87 and 90. But there couldn’t be a less useful way of explaining the life expectancy concept.”

Mr Cooper explained that while life expectancy may be fairly accurate in a pooled sense, the chances of an individual actually dying at that life expectancy age is very small.

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“What in fact happens, let’s say you’re looking at the [female population], the average expectancy is 90, but two-thirds of the 67-year-olds who you’re saying these things to will die between the age of 81 and 99, and the chances of them dying in that year they turn 90 is actually less than 5 per cent – so a one in 20 chance,” he said.

“So, to say to someone, your life expectancy is 90, that is such a weird predictor of what’s actually going to happen. There’s this massive distribution either side of that mean, great in a pool sense, there will be all these random deaths and lifespan, but when averaged out, itll click down at 90, but to say it to an individual is worse than useless.”

Based on data through Accurium’s actuarial database, Mr Cooper noted that the average life expectancy for SMSFs overall tends to be slightly higher than the rest of the population.

“We estimate that you need to add two or three years just to get to the average point for an SMSF member,” he said.

Advisers warned on limitations with life expectancy estimates
Advisers warned on limitations with life expectancy estimates
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