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With decades of expert actuarial experience, David Orford reviews the current risks with using the Australian Life Tables at face value.
Recent research by the Actuaries Institute of Australia found that the tools used by advisers to look up life expectancy may dramatically understate reality for many of their clients. Advisers are given static life expectancy results from the Government Actuary’s Australian Life Tables – but without the Government Actuary’s improvement factors. These improvement factors take into account that retiree mortality rates have been steadily reducing since at least the mid-1960s and are expected to keep doing so.
As macabre as it sounds, your ‘mortality rate’ is the probability you die in the next 12 months. The lower your probability of dying at each future age the higher is your overall life expectancy.
What we are seeing is the current rate of mortality at each age is predicted to reduce significantly by the time someone today reaches that age. For example, using the Government Actuary’s 25 year improvement factors, by the time a current 65 year old reaches age 75 the mortality rate for a 75 year old male will be around 40% less than it was when the tables were produced.
A similar type effect occurs at most ages. In effect, your life expectancy gets longer the longer you live – because the mortality rates decrease!
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Reducing mortality rate for a 75 year old
Source: Optimum Pensions using ALT 2010-12 with 25 year improvement factors
Life tables: behind the trend
Since the mid 1960’s the mortality rate for a 65 year old male has fallen by more than half. This trend is expected to continue. Yet the simple lookup tables for life expectancy don’t take this ongoing trend into account.
Australia now has a history of 125 years of mortality data. The Government Actuary’s improvement tables are based on clear trends on how mortality rates are reducing over time. Life expectancy tools that include these improvements provide a more appropriate figure for somebody’s life expectancy. Not to allow for these improvement factors would be misleading.
If we take our 65 year old’s life expectancy from the simple lookup table in the latest Australian Life Tables (ALT 2010-12 – without improvements) we get the figure of age 84.2 for a 65 male, or 19.2 years from today. For a female it’s age 87, or 22 years.
However, the life expectancy for a 65 year old male, allowing for the Government Actuary’s 25 year improvement rates is 87.1 (or 22.1 years). For a 65 year old female, her life expectancy with improvements is age 89 (or 24 years).
Be more than average – so that you live even longer
However, the average is still not the whole story. In fact, if both retirees were a couple, our female retiree was 3 years younger, they are healthy and wealthy and want an 80% chance their planning horizon can last as long as at least one of them is alive, then they need an income that’s able to last well over 35 years!
Australian Life Tables understate the length of time every Australian will live
In summary, unfortunately based on the static Australian Life Tables (ALT), your real or anticipated life expectation will be understated. Your life expectation from the ALT will understate your real or “expected” life expectation as:
- The ALT were based on the mortality of Australians over the three calendar years centred on the 2011 Census and life expectations have continued to improve since those tables were produced.
- Retirees will hopefully experience reductions in mortality (or increases in life expectation) at each future age they achieve, with the reductions increasing at each succeeding age that they reach.
- The ALT were based on the Australian population as a whole, including those who were not working before they reached their pension age. People who work are generally in better health i.e. have lower expected mortality rates than those people who don’t work e.g. if they cannot work because of some health impairment.
David Orford has more than 50 years experience as an actuary and in the superannuation industry, and is Managing Director of Optimum Pensions.