The American Academy of Actuaries and the Society of Actuaries (SOA) have jointly released the Actuaries Longevity Illustrator, an online tool that calculates longevity risk.
Life expectancy, the groups point out, "is a single number coming from a single set of assumptions, and individuals may outlive that estimate." The purpose of the tool is to provide a range of outcomes that illustrate the uncertainty of longevity risk.
The Academy and SOA note that there is a significant financial risk involved in living longer, which is why retirement planning should include a range of situations and risks that may be encountered.
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According to the American Academy of Actuaries, "A common—and potentially serious—mistake in retirement planning is using life expectancy age as a default planning horizon." Life expectancy is an average, the group explained, meaning that someone who has a life expectancy of 78 has a 50 percent chance of living longer than that—perhaps much longer.
If planning is based only on a standard projection of life expectancy, and fails to consider the range of age possibilities someone could achieve, longevity risk is added to the picture: the possibility that someone could outlive their income.
"The idea of making an interactive Actuaries Longevity Illustrator available as a public service began several years ago, when we noticed that retirees, and those planning for their retirement, did not have access to information that objectively breaks down the nature of longevity risk that can be readily understood both from a conceptual standpoint and operationally for those who are considering retirement income options," Ted Goldman, MAAA, FSA, EA, senior pension fellow of the Academy, said in a statement.
To use the tool, an individual or a couple enters some basic information about themselves, such as age, gender, and general health status. The tool then generates easy-to-read charts showing the likelihood of living to certain ages. For instance, a couple can determine the chance of living a given number of years together, as well as the likelihood that one or the other will survive additional years.
The tool helps analyze longevity risk, but it does not take into account financial aspects of retirement planning
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