One commentator in the UK has described the use of life expectancy in financial planning as "useless" pointing out that:
"...the average life expectancy for a 65-year-old male is 86.5 but 22 per cent of men aged 65 will live to see their 95th birthday."
That is a valid point, but there are some unasked further questions there. One is the likely distribution of cash use over retirement, and for what purposes. Another is the question of risk. Risk is ever present in financial planning, and life duration risk is present too.
Cash allocation over retirement might, for example, see a client elect to spend more in early retirement (age 65 through to 75 or even 80) because they know that they will enjoy greater health.
Thinking about risk means we need to ask client what their tolerance is. Should we be planning for no consumption of capital. You might term that as a 'no risk' approach, but it is also a 'lowest income' approach.
For me the lesson is that while Life Expectancy is of limited use on its own in financial planning it is hard to see how it can be left out. At the very least the client should decide to rule it out themselves and clearly understand that reducing the risk of running out of cash in retirement also has the effect of reducing their income.
You can read the rest of the Money Marketing article by Tessa Norman at this link.