What is wrong is using a single date of death assumption in your analysis of your retiree client's goals?

The main advantage of using a single age at death assumption is that it is makes the calculations much simpler and faster.

There are some serious drawbacks to the use of a single age at death assumption, however.

In general, there are many financial aspects of retirement that are not analyzed if the fact that the client can die at any age is ignored.  The client needs to have an analysis that is consistent with this fact of life.  There is no substitute for planning that recognizes the client’s life expectancy and the associated probabilities of living to various ages.

Different pitfalls arise depending on how the single age at death chosen compares to the true life expectancy (and the probabilities of living to various ages) of the client.  I’ll examine a few of these pitfalls (there are many more I’m not covering in this brief blog) in the different possible cases – (1) when the client’s true life expectancy is greater than the chosen age, (2) when the client’s true age is less than the chosen age, and (3) even when the client’s true life expectancy is equal to the chosen age.  Without loss of generality, I’ll use a current client age of 65 and a true life expectancy of 20 years (bringing the client’s age at death to 85):

 IF THE SINGLE CHOSEN AGE AT DEATH IS LOWER THEN THE TRUE LIFE EXPECTANCY OF THE CLIENT (AGE 80 IS USED):

The annual expense budget will be overstated.  The spending may be designed to last to age 80, but the client will live on average to age 85.  The client’s asset portfolio could become depleted, even though spending recommendations were followed.

Health care costs will be understated (assuming they are even addressed).  The issue of needing long-term care after age 80 will be ignored.  The client may very well live past age 80 and may incur high health care costs.  This could greatly increase the chance of financial ruin.

The analysis of whether immediate or deferred income annuities are helpful will be incorrect assuming the client will die at age 80 in all instances – the analysis would show that annuities would be harmful to the client when they may actually be helpful.

IF THE SINGLE CHOSEN AGE AT DEATH IS HIGHER THEN THE TRUE LIFE EXPECTANCY OF THE CLIENT (AGE 95 IS USED):

The annual expense budget will be understated.  This would cause an unnecessary cutback in the client’s lifestyle.  Sometimes an adviser will set a very high age “so that the client can sleep at night”.  But this gives the client wrong information.  

Health care costs will be overstated (assuming they are addressed, which of course they absolutely should be).  There will be an overstatement of the long-term care and other health care needs.

There will be too good a result shown for immediate and deferred income annuities.  They will be shown to pay out more in benefits than should be shown.

IF THE SINGLE CHOSEN AGE AT DEATH IS EQUAL TO THE TRUE LIFE EXPECTANCY OF THE CLIENT (AGE 85 IS USED):

Health care costs will probably (if the life expectancy is not extremely high) be understated (again, assuming they are addressed).  Health care costs are greatest at the high ages, and assuming the client dies just at the life expectancy will probably understate these costs greatly.  

The analysis of whether immediate or deferred income annuities are helpful will probably be incorrect, even though the correct life expectancy is used.  They will generally illustrate worse than they should, and it is unclear whether the analysis will correctly show if the annuity would be helpful or not.  The actual extent that they would be helpful or harmful will probably be incorrect, no matter whether the direction the analysis gives is correct.

In summary, these drawbacks are serious.  Clients are not getting the information they need to properly plan unless the probability of living to different ages, based on the life expectancy of the client, is incorporated into the planning!