14 Pages Posted: 24 Oct 2016
Date Written: April 1, 2016
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: 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