What is your clients’ #1 fear in retirement? Outliving their income. And what variable has the largest impact on whether or not they will outlive their income? Life expectancy. Your ability to successfully plan for your clients’ retirement is largely dependent on how well you can estimate their lifespan.
Longevity is the new buzz word in retirement planning and rightfully so. It wasn’t that long ago when most people retired at 65 and maybe lived another 5-10 years if they were lucky. Those days are over, which makes current retirement planning a much more challenging endeavor. People are living a lot longer and their retirement nest egg must live a lot longer as well. Not only are lifespans increasing, but statistics tell us that the longer people live, the longer they will live.
According the Social Security Administration, a man who reaches the age of 65 today is estimated to live until he is 84.3 years old. A woman turning 65 today is expected to live, on average until she is 86.6 years of age. In addition to that, 25% of all 65 year olds today will live past 90 and 10% will live beyond 95. This dramatic increase in lifespans is also expected to continue well into the future.
Longevity planning is becoming a larger and larger component of successful retirement planning. In order to ensure that your client does not outlive their income, maintains a comfortable lifestyle and has choices in retirement, you must be as accurate as possible in estimating their life expectancy.
Unfortunately, estimating longevity is not even close to an exact science. The traditional approach for most advisors is to rely on actuarial tables for a best estimate. However, with life expectancies increasing practically every year, the mortality tables may no longer be enough.
Overestimating life expectancy is almost as bad as underestimating it. You may think a safe response to the whole longevity question would be to simply assume death at the age of 105. While underestimating could result in the client outliving their income, overestimating can affect the client’s quality of life throughout their retirement by forcing them to spend less than necessary.
To increase the probability of success in estimating a client’s lifespan, advisors should consider developing an individualized life expectancy analysis for each client. Begin by emphasizing to clients that everything you do in planning for their retirement revolves around this number. Therefore, it is critical to the success of their retirement plan that you are able to estimate their lifespan as accurately as possible. Only then can you begin to develop a plan that will adequately provide for that lifespan.
Areas you’ll want to consider when doing their individualized life expectancy analysis are: medical history, family history and lifestyle habits. These are some questions you might want to include.
Medical History/Family History
- Have they ever had a heart attack or been diagnosed with any kind of heart disease?
- Are they or have they ever been on cholesterol medication?
- Have they ever been diagnosed with high blood pressure?
- If so, are they on medication?
- Have they or anyone in their immediate family—parents, grandparents, siblings ever had a stroke?
- Have they or anyone in their family ever had any type of cancer before?
- Are their parents still alive?
- If not what did they die of and how old were they when they passed away?
- Are all their siblings still alive?
- Have any of their siblings experienced any serious health problems?
- On a scale of 1-10 with 10 being a health nut and 1 they eat at McDonalds every day, how would they rank their diet?
- Do they exercise regularly?
- How many times a week?
- What kind of exercise?
- Have they ever smoked?
- Did either of their parents smoke?
- How many days a week on average do they consume alcohol?
- Do they always, sometimes or never wear a seatbelt?
- On a scale of 1-10 with 10 they could go postal any second and 1 they’re in a coma, how would they rank their daily stress levels?
It’s probably best to go through these questions with your client so you can add your personal touches and even some humor where appropriate. You can then explain to them that you’ll be reviewing their answers together with the actuarial tables to determine the life expectancy you’ll be using when developing their retirement plan.
Once you’ve completed the process, review the mortality tables and decide whether years should be added or subtracted from the client’s life expectancy based on their answers to the questions. A large number of “bad” answers, especially the parents’ age at death, would justify lowering your estimate while a preponderance of “good” answers would suggest an older estimate is appropriate. The parents’ age at death is generally considered an anchoring data point for most longevity estimates unless death occurred by other than natural causes.
Obviously no one can know for sure how long a particular client will live. As mentioned earlier this is definitely not an exact science, but it will likely give you a better estimate than relying on the actuarial tables alone.
The more accurate your estimate, the better your retirement planning will be. Taking clients through this process will give you additional insight into appropriate strategies to use in their retirement planning as well as proper asset allocations at different stages of their retirement.
Your clients will appreciate the extra time and thought you’ve put into getting their retirement plan right. Doing an individualized life expectancy analysis will also truly set you apart from your competition.