Numbers Do Count: Impact of Updated Mortality Tables

Lately, I’ve been reflecting upon the importance of numbers in our lives. There are scientific numbers such as the speed of light, absolute zero, H2O, the value of Pi, the Chandrasekhar limit, and my last grade in high school physics.

On a personal level, we can apply for a driver’s license at 16; register to vote at 18; begin drinking alcohol at 21; retire at 65; get hit with minimum required distributions (RMDs) at 70 ½, and eventually die between the ages of 85 to 95.

Obviously some numbers carry more weight than others. A growing waist size is probably more important than a shoe size. Driving 80 on a highway is a big number; having $80 in my wallet at Saks Fifth Avenue? Not so much—especially when I am shopping for the two most important numbers in my household: my anniversary and wife’s birthday. These two rank just slightly higher than managing the numbers that help keep me alive, which include blood pressure, cholesterol, triglycerides, hospital co-pays, and eventually Social Security benefits.

 

And now, the Society of Actuaries (SOA) has published some new numbers for us to dwell upon. Without getting into fractional details, the SOA released new mortality tables highlighting that Americans are living longer than ever—two years longer, in fact. (See https://www.soa.org/Research/Experience-Study/pension/research-2014-rp.aspx)

The SOA report focused on pension plan funding liability, and the data illustrates that longer life expectancies will make it more difficult for pension funds to meet their future obligations. The SAO concludes that pension plans need to consider increasing contributions to maintain long-term solvency.

If a longer lifespan can influence a pension fund with tens of millions of dollars, it will certainly have a financial impact on you and me. Here are a couple of examples of how living longer will affect our personal retirement health care funding liability.

Age Gender Life Expectancy Total HC Costs Cost of 2 More Years of Life Cost of 5 More Years of Life
55 Male 86 $201,701 $26,426 $68,482
55 Female 89 $239,790 $28,095 $72,727

*All costs are illustrated in today’s dollars and are based on HealthView projections.

**“Total cost of health care” includes Medicare A, B, D and supplemental insurance premiums as well as all other projected out of pocket expenses including co-pays hearing vision and dental costs.

As you can see, the longer we live, the more we will pay for health care services. Let’s face it; living is expensive, but it is usually better than the alternative, so like the pension plan administrator, we need to work on reducing our future liability risk and increase our contributions to retirement savings.

For example, based on the future value of health care costs of an additional 2 years of life, a healthy 55-year-old woman would need to save $13,875 today growing at 5% compounded annually to pay for her last two years of healthcare expenses.

Interestingly, a recent Insured Retirement Institute (IRI) Report titled, “Being Healthy Adds Up in the Long Run” analyzed the health care expenses of healthy and unhealthy future retirees and concluded that healthy retirees will pay more for services in retirement because they will live longer. (http://irionline.org/newsroom/newsroom-detail-view/iri-report-being-healthy-adds-up-in-the-long-run)

Contrary to popular belief, being healthy and living to 89 is actually more expensive than helping yourself to those extra fries and checking out at 84.

The numerical kicker is that a longer life span may increase costs exponentially because of the compounding effect of inflation. Thus, a 55 year old woman expecting to generate an average monthly Social Security income of $1,294 (in today’s dollars compounded at 2% annually), will require 130% of her future Social Security income just to cover health care expenses in her additional two years of life.

From a sheer numbers perspective, 911 can’t help. Instead focus on the number 8, which in many cultures represents luck, prosperity, and infinity. If you are lucky enough to be healthy and smart enough to take care of your body, save more today because you may need it for an infinite number of years.

The cost of staying alive can equal a big number- but it is usually worth it.

2014-11-17T20:44:46+00:00