by Michelle Ash, CFP®, CDFA™
Any financial planner who’s been helping clients plan for, or live, in retirement will tell you that a discussion on longevity can be an interesting conversation. There is no topic which has caused as many clients to outright laugh in my face when I tell them our standard planning assumptions as this one. You see, a financial planner’s job would be quite easy – an exercise in mathematical computations alone – if only a client could reliably provide one critical piece of information: how long they are going to live. Sometimes I joke and ask my clients to look into their “personal crystal ball” and tell me what they see there in regards to their own longevity. In response, sometimes they squirm, sometimes they get real quiet, other times they won’t even give me a straight answer. It seems the idea of talking about this critical piece of information – how long we’ll live – or its inverse – when we might die – can be quite the taboo subject.
At times people comment that “young people” – a term that’s always a relative description, of course, don’t have difficulty talking about this subject because the young believe they are invincible, thinking they’re never going to die. I have had this comment said to me by 60’s-something clients a few times as well. Perhaps it would be helpful to explain my outlook on this topic, so my attitude won’t seem cavalier, ignorant, or insensitive.
At the age of 38, I have only one grandparent left. The first died at age 52, a few years before I was even born. The other two both passed at their age of 65; I was about age 16 at the time. All three of them died from “the big C”, or Cancer, for those of you not acquainted with the term. I have an aunt and an uncle (one on each side of the family) who died in their 50’s also, from the big C as well. My remaining grandmother is going strong at age 81, showing signs of being around for years to come. She ballroom dances competitively, just retired (for the third or fourth time) last month, and is someone whom I’ve long told friends has more energy than two of me – a feat I can’t fathom since she only sleeps 3-4 hours per night. She is the role model I aspire to and I hope I’ll be blessed with her presence for a long time to come. Despite what I sometimes think of as “bad genes”, my parents, too, are thankfully quite healthy. They are conscientious of being so in their lifestyle choices, which I have long believed helps them overcome their own parental genetic history.
But given the grandparent longevity, or lack thereof, and given the fact that I personally have a chronic illness I was diagnosed with two years ago which will be with me the rest of my life, I unfortunately cannot claim to be one of those people with expectations to live to 100. I haven’t ruled it out, believe me; I am going to try, especially since my condition isn’t one that usually leads to significant implications on mortality. However, I think much in the way that clients in their 60’s sometimes realize there might statistically be only 20 or so years ahead of them, I too have to factor in that, at least based on three of my direct lineal relations, I may have way more time behind me than in front of me.
So from that perspective I stare, head on, with clients, into the reflecting pool of longevity, realizing one absolute: that none of us can escape the eventual fate of having a finite longevity.
How can an individual doing retirement planning think about the issue of longevity? What factors should they consider, and once they do, how should they use that information? What are the impacts longevity – good or bad – plays on the retirement planning? These are the questions we must discuss when considering this topic.
Longevity Factors to Consider
When it comes to factors to consider in deciding a longevity assumption, there are three major items that come to mind:
1) Family history
2) General statistics
3) Personal lifestyle choices
When I talk with clients, we generally talk through these three items. I’ll ask them how long people in their families tend to live. The answers range widely: some people will say no one’s ever lived beyond the age of 75. Others will tell me they’ve got four or five immediate relatives at or near age 100. Many will tell me one parent’s side of the family lived long lives, and the other side lived short or average lifespans. Only when the answer is at either extreme does it really provide any clear planning decision.
Next, we discuss general statistics. In the United States, at present, a 65-year-old man can expect to live to age 82.1; a 65-year-old woman to age 85.(1) However, ethnicity, race, and country of origin do play roles in this discussion. World-wide, the United States is 36th in terms of life expectancy, with an average life expectancy from birth (not gender specific) of age 78.3. By comparison, the Japanese have the longest longevity, with average non-gender-specific longevity from birth of age 82.6 – more than four years greater than the average American. Countries including Australia, Canada, and the UK are all ahead of the U.S. on the longevity scale.(2) Regarding race, in the United States the average Asian-American has the longest life expectancy at 84.9 years. After that, the average Caucasian has a life expectancy of 77.9 years, the average African-American 72.9 years, and a Native American’s averages 72.7 years. This is a span of more than twelve years’ difference between the various racial groups.(3)
But beyond statistics and even family history, one’s personal lifestyle choices likely have a tremendous influence on longevity. Do you regularly jump out of airplanes and race motorcycles without a helmet, or are you a person who prefers a safer, less adventurous lifestyle? How’s your diet and nutritional intake? Do you get regular exercise? Do you see your dentist and doctor regularly? Do you manage your stress? We could spend hours and pages on these items and each of their likely impacts on our life and longevity.
But do those theories always prove to be true? We all occasionally hear about a little old man who lived to age 104 who smoke, drank, and gambled all his life. Sometimes, the crystal ball is fuzzy and you just never know when the end will be.
How to use Longevity Considerations in Retirement Planning
After exploring issues of family longevity, statistics, and personal lifestyle with a client, I like for us to decide together what longevity they feel is realistic to use. As planners, we start with a baseline assumption of age 95, adjusting upwards for those clients whose families demonstrate a proclivity for age, or those clients who want to assume a longer age as a safeguard. But, for those clients who would prefer to use a shorter longevity, I always caution them that doing so, and then living “too long”, could cause undesirable consequences.
You see, here’s the importance of longevity in retirement planning: the longer you live, the more money you are going to need because of the compounding effects of inflation on expenses over the long term. Here’s a simple illustration of what I mean:
Longevity to age 95 versus Longevity to age 85:
In the fact pattern illustrated above, keeping all other facts, figures, and assumptions the same, the top chart – longevity to age 95, shows the likelihood of a significant spend-down in assets. The bottom chart, longevity to age 85, on the other hand, seems to indicate that the client is never dipping into principal. In fact, their portfolio would be projected to grow and be larger at death than it is at present.
Now, extrapolate that into trying to advise a client on how to spend their money in retirement and invest: with the forecast at the top (to age 95), I would be counseling my client to be prudent with their expenditures over their lifetime, realizing that investment returns are just as unpredictable as longevity. What if the client on the left has unforeseen increases in costs due to medical events, or the need for long term care? If these aren’t included in our current planning, running out of money might well be within the realm of possibilities.
Advising the client with the projection at the bottom (longevity to age 85), however, might cause an advisor to tell the client they can likely spend more money than they currently do, should consider gifting strategies over their lifetime, endeavor tax and estate planning techniques that will mitigate the likely increase in taxes that is coming from this future forecast of an ever-growing portfolio, or invest much more conservatively because it looks like they’ll have plenty of money no matter how long they live.
See the drastically different advice that comes out of one seemingly small assumption?
How to Decide Which Assumption to Use
Generally, the only clients I’ve met who can provide me their longevity with reasonable predictability are those whose longevity is relatively short, often from some terminal illness now beyond their control. For everyone else, sooner or later, a choice of assumption must eventually be made. I tend to see three schools of thought clients use to decide:
• Conservative approach: Use a long life expectancy, even beyond what might be reasonable for them personally, because not running out of money is more important to them than the financial flexibility a shorter life expectancy might provide.
• Moderate approach: Assume an average, or even slightly longer than average, life expectancy, to account for the majority of likely longevity implications. Act according to those results. If money runs out, have a contingency plan (ie- the kids will have to take care of me), but have an expectation that the contingency probably isn’t necessary.
• Aggressive approach: Some clients want to spend it all. Sometimes I hear people say, “I want my last check to bounce.” They may request the most aggressive (short) life expectancy assumptions, even if their family history and personal circumstances would indicate otherwise, because their intent is to spend down assets. Sometimes they have a backup plan if there’s more life than money; other times they think they’ll figure it out if and when they get there. Personally, as a planner, I like this method the least. I encourage against it and I document like crazy as a future CYA measure in case the worst does come to pass.
But ultimately, which approach will prove right? Truly only time will tell. Until it does, here are three mitigating suggestions:
1) Use different longevity assumptions and see what the planning outcomes are for each. This approach can be helpful if you’re really not sure which assumption to use. At least then you can know the results and begin to get a sense of different outcomes. Doing so might also help you with other actions you need to take, regardless of deciding a specific longevity. For example, if you want to invest really conservatively in retirement for fear of market volatility, but doing so means you only have enough money to age 70, you may instead want to consider working a bit longer so that you can give yourself the freedom to invest the way you are comfortable. In this example you don’t need to decide a longevity, because the planning assumptions you are using make the other decisions for you.
2) Use a blended spending strategy in retirement. People who aren’t retired often see retirement as this one large life event: you retire and that’s it. Retirees will tell you that retirement is often a more complex life event. In fact, today four stages to retirement are recognized:
a. Newly retired (first 6 months): discovering who you are without your work world identity
b. Recently retired (6-24 months): exploring all the new hobbies and ideas you may want to pursue as you enjoy retirement
c. Retired (2 years – 20 years): Life as a retiree has developed a routine; enjoyment of the lifestyle chosen occurs in this phase
d. Late Retirement, Elder Issues: Life slows down considerably as age and illness related issues often occur
As financial advisors, we often see that clients might desire to spend a greater amount of money when they first retire as they are exploring the newness of retirement. Once the explorations have occurred and a routine develops, expenditures may slow down until later when elder issues enter the picture and raise costs again. A financial plan can account for these different spending levels, if planned in enough detail.
3) Revisit your longevity assumption periodically. This is actually a recommendation I’d make no matter what the planning scope is. Planning – financial or otherwise – inherently requires assumptions. Assumptions are, by their very nature, just guesses and are sometimes wrong. Revisiting the longevity assumption you make over time can be very helpful. If a client chose to use a short life expectancy upon initially retiring, but now realizes there might be many more years ahead, they may be able to alter course to continue a comfortable retirement. If a client chose a long life expectancy but has developed a health issue that changes that forecast, they might decide it’s time to accelerate spending or gifting their assets.
Choosing one’s longevity assumption can be interesting, thought-provoking, or even sometimes scary. In my mind, though, there’s only one thing scarier – making no assumption at all, having no plan at all, and then hoping the results are ones you can live with.
1 National Vital Statistics Report, Volume 56, Number 9, December 28, 2007 U.S. Department of Health and Human Services, Center for Disease Control and Prevention (CDC). Year 2004 data.
2 Wikipedia: http://en.wikipedia.org/wiki/List_of_countries_by_life_expectancy
3 “Health News: Race, Income, Geography Influences US Life Expectancy”, by Tom Harrison, 9/12/06 http://health.dailynewscentral.com/content/view/0002418/42/
This blog article does not constitute legal, tax, or personal financial advice. Please consult your own financial professional for personal, specific information.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
Investment advisory services provided by Paragon Wealth Strategies, LLC., a registered investment advisor. https://www.WealthGuards.com