Life Expectancy

The speaker discusses the risks that life insurance companies bear with increasing life exepectancy due to better medical technology and more infomation.  He indicates that there is a 3 to 5% increase in potential deficit of a pension fund for every year of increased life expectancy and this is causing planning problems for governments, corporations and educational institutions.

What is a Life Expectancy Table?

The life expectancy table provides a life expectancy factor which is used in the calculation of the SEPP, or substantially equal period payments for two of the three available distribution methods: Required Minimum Distribution and Fixed Amortization.  The life expectancy table is just that, it estimates the number of years remaining in an individuals life and this number is known as the life expectancy factor. The life expectancy factor is used to spread annual withdrawals from your retirement account for the expected remainder of your life.

The IRS provide three different life expectancy tables for individuals to select from.  Typically, individuals will select one table over the other based on whether they will have beneficiaries or not.  The existence of a beneficiary on the account will extend the life expectancy of the account, thereby lowering the annual distributions from the account.  The three life expectancy tables are: single life expectancy, joint life expectancy, and uniform lifetime.  To review the tables, visit the IRS website.  You should note that once you select a specific table to calculate your annual distributions, it is not changeable unless you are switching from the Annuitized or Amortized methods which caused many to run through their money much faster than they anticipated back in the 2000 to 2002 timeframe due to the falling stock market.

Single Life Expectancy Table

The single life expectancy table does not use your beneficiaries age when computing your life expectancy.  Since you will have a lower life expectancy factor, your payments will be distributed over a shorter number of years, thereby increasing your annual payments.  This method is available to all account holders.

Joint Life Expectancy Table

The joint life expectancy table is used primarily by individual who are married and have their spouse as beneficiary on their retirement account.  The joint life table estimates the number of years that it will take for the second of two individuals to die. 

While it is primarily for married individuals, this table is not required to be used if you are married.  Additionally, this table is used by those who have a spouse who is more than 10 years junior.  The Uniform Lifetime table does not allow couples in this situation to use that table.

Uniform Lifetime Table

The uniform lifetime table can be used by all account owners with the exception that we stated above.  If your spouse is more than 10 years younger than you and is beneficiary on the account, the uniform lifetime table cannot be used.  This table estimates your joint life expectancy but does not use your beneficiaries age to do so.  This is the reason why many choose to use this table; its simplicity and ease of use.