The Implied Longevity Curve: How Long Does the Market Think You Are Going to Live?

14 Pages Posted: 24 Oct 2016  

Moshe A. Milevsky

York University - Schulich School of Business

T. S. Salisbury

York University

Alexander Chigodaev

National Research University Higher School of Economics; York University - Department of Mathematics & Statistics

Date Written: April 1, 2016

Abstract

We use market quotes of life annuity prices to extract information about the market’s view of survival probabilities using a framework that links the term structure of mortality and interest rates. Our main computational result is that in the year 2004 prices implied a 40.1-percent probability of survival to age ninety for a seventy-five-year old male (51.2 percent for a female). But, by early 2014 the implied survival probability had increased to 46.1 percent (and 53.1 percent). The corresponding implied life expectancy has increased (at the age of seventy-five) from 13.09 years for males (15.08 years for females) to 14.28 years (and 15.61 years). In other words, over the past decade markets implied an improvement in longevity of between six and seven weeks per year for males and between one and three weeks for females. Although these values are implied from quotes, they are consistent with forward-looking demographic projections. Similar to implied volatility in option pricing, we believe that our implied survival probabilities and implied life expectancy are relevant for the management of assets post-retirement by helping to raise awareness of longevity risk. Further research might apply this methodology to extract information about additional pricing components such as the change in fees and loadings over time. This research is relevant to practitioners interested in the optimal timing and allocation to life annuities as our results indicate that annuitization procrastinators are swimming against an uncertain but rather strong longevity trend.

Keywords: Wealth Management, Retirement Planning, Insurance, Annuities, Pensions, Longevity, Aging and Demographics

Suggested Citation

Milevsky, Moshe A. and Salisbury, T. S. and Chigodaev, Alexander, The Implied Longevity Curve: How Long Does the Market Think You Are Going to Live? (April 1, 2016). Journal of Investment Consulting, Vol. 17, No. 1, p. 11-21, 2016. Available at SSRN: https://ssrn.com/abstract=2792276

Moshe Arye Milevsky (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Tom S. Salisbury

York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Alexander Chigodaev

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

York University - Department of Mathematics & Statistics ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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