Random Years of Retirement

Overview

One of the challenges in retirement planning is determining the number of years that the individual will be in retirement. This is generally due to the fact that the individuals time of death is random.

Mortality Tables

One of the primary ways to determine a number of years of retirement is to construct a mortality table. That is, the analyst compiles a table of the age of death of individuals who are similarly situated to the individual in question.

The mortality table can be used be used in two ways:

• Average Age at Death - compute the average age at death and then target that age for when your retirement portfolio runs out. This has the obvious downside that you may outlive your retirement savings.
• Percentiles of Age at Death - computing the percentage of individuals who live past a certain age will gives you a way to determine what the probability is that you will outlive your retirement savings. This information can be used to target a portfolio that will not be depleted prior to death to a certain degree of probability.