Tuesday, July 16, 2013

Gender differences in life expectancy and retirement planning.

Gender differences in life expectancy and implications for retirement planning.

It is well known that on average women live longer than men.   The questions in today’s post pertain to the size of the gap between male and female life expectancy and the implications of this gap towards retirement planning.

Questions:

What is the expected future life expectancy of a 62 year-old male/female in the United States?

What is the expected future life expectancy of a 72 year old male/female in the United States?

What is the likelihood that a 62-year old male/female will survive 10 years?

What is the likelihood that a 72-year old male/female will survive 10 years

What are the implications of these results with regard to the use of the 4.0% rule on the disbursements of resources from a retirement account by males and by females?

What are the implications of these results with regard to the use of reverse mortgages by males and by females?

Background

Life tables used in this analysis are found in the CDC report -- United States Life Tables 2008.

The actual data we need is in Table 2 (Life Tables for Males) and Table 3 Life Tables for Females.  The report contains links to Excel spreadsheets that contain the data.

Analysis:

Statistics on expected future life at age 62 and at age 72 by gender are presented below.  At age 62, expected future life is 19.5 year for males and 22.4 years for females.  At age 72, expected future life is 12.6 years for males and 14.7 years for females.

 Expected Future Life Age Male Female % Diff. 62 19.5 22.4 14.87% 72 12.6 14.7 16.67%

Note the gap measured by the percent difference in expected future years females over males is larger at age 72 than at age 62.

Life table survivor statistics are based on 100,000 births.  Statistics on males and females who remain alive at age 62 and age 72 are presented below.

 Survivor Statistics Age Male Female 62 83435 89994 72 68536 79184 % survive first ten years 82.14% 87.99%

The likelihood a 62-year old male survives ten years is 5.8 percentage points less than the likelihood a 62-year-old female survives ten years.

Statistics on male/female survivorship age 72 to age 82 are presented below.

 Survivor Statistics Age Male Female 72 68536 79184 82 42227 56688 % Survive Second Ten Years 61.61% 71.59%

The likelihood of surviving until age 82 is 9.9 percentage points less for males than for females.

Implications of life expectancy differences for retirement planning:

Under the 4.0% rule, a retiree takes 4.0% of the initial account balance out the first year.     Subsequent annual disbursements are equal to the real value of the initial disbursement.  The number of years until the account is depleted depends upon asset returns and inflation.  A recent post indicated that years until depletion can vary widely.

All else equal, the 4.0% percent rule will result in more women outliving their resources than men.

Note from the example presented above the difference between the proportion of women and men outliving their resources is larger for the 10 year planning horizon starting at age 62 than for the 10 year planning horizon starting at age 72.   This suggests to me that it is useful to make adjustments to spending early in retirement rather than late in retirement.

The borrower in a reverse mortgage can live in a home until he or she dies or moves.   Since on average women live longer than men the free-rent aspect of the reverse mortgage is more valuable to women than to men.  But there are problems and risks associated with reverse mortgages, which can are smaller for older applicants than for younger applicants.  See the post below for a discussion of problems with reverse mortgages.

Borrowers with reverse mortgages are responsible for all taxes and insurance and failure to maintain these payments can lead to default and foreclosure.  The amount that can be borrowed with a reverse mortgage is larger for older applicants than for younger applicants.  All individuals considering a reverse mortgage both males and females should consider other options first.

A final note:  While women are more likely to outlive their resources than men there is considerable intra-gender variability on duration of life.  (Many men live a long time and some women die young.)  All people (both male and female) have to prepare for a long and hopefully happy life.