Joint Life Expectancy: A Better Methodology for Retirement Distribution?

While past research has often focused on a fixed distribution period for retirement income, using a joint life expectancy might better address the primary goal of retirees to provide income for life.

In a paper for the Journal of Financial Planning, co-authors David and Brian Blanchett (yes, they’re brothers) explained how joint life expectancy can be used during the retirement distribution period.

One finding of the research is that using a joint life expectancy results in a 1% to 2% higher withdrawal rate for the same probability of failure than one based on a fixed period. “Therefore, the sustainable real withdrawal rate available based on a fixed time period is likely an overly conservative estimate for most retirees,’ according to the report.

David Blanchett, a full-time MBA student at the University Chicago and who also works for Unified Trust Company, said he has used fixed distribution periods for most of his research; however he sees one problem with using fixed periods when it comes to creating income for life. He explained to that a fixed distribution period doesn’t take into account someone dying during that distribution period; it doesn’t address the actual life expectancy of an individual or a couple.

“There’s nothing wrong with the fixed-rate approach, but this is kind of a more pure methodology, because this is answering the question we are trying to more or less answer in our research and for our clients: What amount of income can I take from a portfolio to create lifetime income?,’ Blanchett said.

While there’s no product behind the research, Blanchett noted that there are implications for companies to develop a product that does this, as it’s a complicated process for advisers to do on their own. Most products Blanchett is aware of allow you to do dynamic things around a fixed period, and do not take consider the likelihood of living to each age at each point in time. Further, most products are developed just for one person and not a couple.

“It’s just one part of the growing body of distribution research,’ Blanchett added. It should be considered along with other things in the retirement distribution phase, such as sequence risk, the impact of changing mortality, and the impact of dynamic changes to a distribution portfolio. “This is just one of those things to be considered when picking that final withdrawal figure for a client,’ he said.

You can listen to an interview with Blanchett here (click the link to download the audio file).