How does Income Lab handle longevity planning?

Using Longevity Risk to Produce Plan Length

Rather than asking for explicit dates of death or ages at death in the planning process, Income Lab's default approach to longevity planning is to ask for clients' attitudes toward their longevity. Specifically, plans specify a Longevity Setting similar to what some researchers call “longevity risk tolerance”. In the context of retirement income planning, Longevity Risk is the chance of living longer than your plan. For example, a plan with 30% longevity risk for a 65-year-old male is long enough that 70% of males currently 65 years old will have died by the end of the plan, while 30% of that original cohort will still be alive. 

This approach to longevity planning allows clients and advisors to act on facts and opinions clients may bring to the planning process, including family history and trends, lifestyle factors, etc., without being experts in actuarial science and without having to pick a date or age of death, a choice that can be fairly uncomfortable.

There are 13 pre-set longevity settings in the Income Lab app, represented as positions on the Longevity Setting slider.
 

Below the slider (or pair of sliders for a joint plan), you will see the plan length that would currently apply for the clients in the plan with this longevity setting.

The settings on this slider correspond to the following longevity risk levels.

At any given setting, plan lengths will be longer for females than males, longer for younger clients than older clients, and longer for couples than for single individuals. For a joint plan, plan length is based on joint survivorship, which is the chance that at least one of the couple survives until the end of the plan. Joint survivorship is always higher than single survivorship.

Plan lengths produced from these settings come from Income Lab's actuarial engine. Mortality data are drawn from Society of Actuaries (SOA)  RP-2014 mortality tables with MP-2017 improvement scales. SOA RP data reflect expected mortality for retirement plan participants. Income Lab uses these mortality tables rather than the often-encountered Social Security mortality tables because they better represent the expected mortality of those whose advisors use Income Lab in their planning. There are wide disparities in longevity across the US population based on economic status. Use of population-wide mortality rates will therefore tend to skew planned longevity toward inaccurately low numbers for those who have assets they can use to support retirement income.

On a monthly basis, all longevity calculations for plans tracked and monitored on Income Lab are updated. This includes reevaluating plan length based on the current client age(s). Keeping up with client ages is vital if plans are to deliver available income to clients and optimize the standard of living in retirement. As people age, their remaining life expectancy goes down. For example, the figure below shows the planned remaining joint plan length for a male/female couple who begin retirement at age 65 and who desire to plan for a 30% Longevity Risk Level. Note that the line is not linear. As time goes on, the oldest age in the plan gets pushed further out.

As joint life expectancy goes down, the percentage a household can withdraw from investment accounts at a given risk level goes up. Income Lab’s actuarially informed approach to plan length helps advisors and clients take advantage of this fact.

Because plan length is refreshed every month, it is impossible for a plan that is being actively monitored to ever "catch up" to its initial plan length. While a plan may be 30 years long at age 60, by age 89 (if the client lives that long), the plan will not be one year long - it will have extended farther into the future. The minimum plan length for an Income Lab plan is five years. This ensures that spending capacity never implies spending 100% of a client's assets in a single year or month.

Specifying a Date of Death

There are situations when it is appropriate to specify an explicit date of death for a client in a plan, rather than depending on longevity risk tolerance and actuarial tables. To specify a date of death for one client in a joint plan, simply toggle from the slider to the calendar option either in the “Show Settings” side bar on the main dashboard

Or go to the plan's Advanced Settings > Longevity Settings section and click the calendar icon by the client for whom you'd like to specify and end of plan.

In both cases, be sure to save the settings and rerun the plan.

If the plan is joint (has two clients) and you set a date of death for one client, the full plan length will be based on longevity expectations for the other client in the plan. In other words, plan length is no longer based on joint survivorship. It is now based on single survivorship. The specified date of death must be within the plan length derived for the other (surviving) spouse in the plan.

If the plan is single (only one client) and you set a date of death, the plan will end on this specified date. If the plan is joint and you set dates of death for both clients, the plan length will be the longer of the two.

When you specify a date of death, the software will automatically show changes that occur after the death. These include changes in in income (for example, Social Security), taxes (married filing jointly changes to single), and even account balances (for example, IRA assets will move to the spouse's IRA).

If you specify a date of death that is in the past, this date will be ignored and the plan will behave as if the date of death had not been specified. This is because, if someone actually dies, we expect the advisor to update the plan to reflect this. If you need to create a plan for a situation where someone has died in the current year (in order to show married filing jointly tax rates for the current year and single rates thereafter), put the date of death in December and then update the plan in January.

Mortality Adjustments

One advantage of Income Lab's approach to longevity planning is that we help avoid overstating the amount of income a household can prudently spend in situations where one or more income sources would change upon one spouse's death. For example, the total amount of Social Security received by a widow(er) will almost always be less than the household received in total when both spouses were alive. Income Lab uses mortality adjustments, again based on actuarial statistics, to adjust a plan to account for the mortality risk of this sort. (Mortality risk in a retirement income plan is the risk that available income will go down if one spouse dies.)

For more on these adjustments, please see our video, webinar, and article on mortality adjustments.