What are advisors using as a benchmark for life expectancy in planning?
Humans are living longer. Are advisors taking this into account and, if so, how?
Advisors are definitely taking longer lifespans into account. More Americans than ever are living to 100 so planning for a long lifespan is a smart thing to do. Further, many people are spending as much, if not more, time in retirement than they did in their career so it's easy to underestimate just how long a span of time you have to plan for. Practically it's important to keep in mind that there will come a day when one's opportunity for earned income is extremely limited. So, being open to some kind of gainful employment in your 60's and 70's is a very reasonable thing to do. Active retirements are usually the longest retirements. This might mean turning a hobby into something that brings in a little money here and there. Selling pottery, artwork or antiques, or doing some consulting etc. Taking this approach can go a long way towards protecting your nest egg during the most active and expensive phase of retirement.
An area where I see longer lifespans impacting financial plans is in the area of social security. A lot of folks I talk to feel that they should take S.S. as early as possible because if they pass away at 75 they will have missed out on all the money they could have received had they taken the benefit earlier. I understand that argument but being an optimist I see it making more and more sense to wait and take the best payout. While it is true that you might not live to 95 or 100 it is smart to hedge against long life by ensuring a higher social security payout.
A financial plan often consists of cash flow projections to determine the likelihood of success for future goals. These projections must make certain assumptions that can hugely affect the outcome. Therefore, unrealistic expectations regarding certain factors could skew the result, meaning clients could face a far different reality than what the math suggests.
We think it’s important to be conservative. Don’t assume that invested assets will grow at 10% every year, for example. In addition, as you suggest, clients and advisors need to remember that years in retirement continue to lengthen. As medicine and technology improve exponentially, retirees will live much longer than ever before, which means assets often need to last for many years after retirement. Therefore, a conservative plan should assume clients live into their 90s and beyond. This often means that planning no longer follows a traditional lifecycle where clients enter full retirement in their mid-60s.
Ultimately, financial plans not only need to align with a particular client, but also with the changing external factors that can affect success.
In my life insurance practice, increased longevity is definitely a factor. To tell you the truth, the actuaries are amazing me. They are actually calling for policies with the premium and death benefit guaranteed to age 121! Can you believe that? And we're talking here about people who need to be financially conservative, and make sure their companies don't take on excessive risk. They must have a solid reason to expect people to live that long, or close to it.
As a result, I see a number of consumers wanting their policy to be guaranteed past age 100. In some cases I have seen a request for age 106, or 110. Once people see that it is possible to have coverage that long, they take more seriously their family history of longevity, their healthy lifestyle, improvements in medical care, and other factors. They really start believing a longer life as possible. And so it becomes a self-fulfilling prophecy.