Should your parent’s age at death guide your own attitude to longevity risk for you and your partner?

This is a real story about a married man who retired at age 55 after an intense career at a bank.  He was offered the choice of either a defined benefit lifetime income stream, offered to him by the bank, or a lump sum to invest and manage to provide for his own retirement. It was up to him to decide which is the right retirement solution for him and his wife.

Let’s call this person Mark to protect his privacy.

At the time Mark took into account the fact that his parents had both died in their mid to late 50s and, whilst he was healthy, thought his own life expectancy may be short. As such, he decided to cash in his defined benefit pension and take a lump sum which got invested in an account-based pension.  This product let Mark choose the investments and decide how much to withdraw each year (subject to an annual minimum withdrawal rate).

23 years later at age 78, Mark and his wife project that at their current lifestyle spending level, their account-based pension will run out in six years at age 84.  Fortunately, they also have an investment property which they will need to sell to maintain their lifestyle.

Mark and his younger wife realise that they may well have many years of life ahead.

He wishes he had taken at least part of his retirement payment as a lifetime income stream; being either the defined benefit pension offered from the bank or purchasing a lifetime annuity from an insurer. In both cases he could have taken a reversionary pension, which continues looking after his wife if he were to die first.

This story brings into question to important issues:

• the link between a person’s longevity and that of their parent’s, and
• what other actions can be taken for a retiree to better manage their remaining longevity risk.

How strong is the link between yours and your parents’ longevity?

Considering the link between a person’s parents’ longevity and their own, research [1] finds a man’s chances of reaching 90 is highly correlated (42% higher) where their father reached age 90 than those whose fathers did not reach age 80.  Similarly, women’s chances of reaching age 90 are 20% more likely where their mothers reached 90 than those who did not reach age 80.

This research also suggested that the correlation is due to not just shared genes but inherited environmental factors, such a socio-economic status and education as well as inherited behavioural factors, such as lifestyle habits and attitudes to health care.

So, what do we learn from this and what can Mark do about it?

If you are one member of a couple, then your retirement plan should really manage both your own lifespan as well as your partner’s longevity risk, either by purchasing a lifetime annuity in their name, or nominating them as the beneficiary under a reversionary policy in your name.

In our friend’s case, it is worth thinking about whether to use part of the proceeds of sale from the investment property to purchase a lifetime annuity with a reversionary spouse’s benefit, with the rest being kept in an account-based pension.

Recognising that each of us does have some control over our own health and longevity, in particular with having good lifestyle habits and health care, positive action can assist remaining healthy and increasing your own longevity.  Sensible financial planning can then deliver peace of mind that your assets can also match this extended longevity.

[1] https://pmc.ncbi.nlm.nih.gov/articles/PMC7898670/ Netherlands Cohort Study 2020