Advances in medicine will contribute to a greater stratification of life spans. Retirees with a life expectancy of an additional 30 years can tolerate more risk in their investment strategies and need to achieve higher returns since they are at greater risk of outliving their savings. Knowing a client’s life expectancy allows financial advisors to develop a more precisely tailored investment and retirement plan. During the last decade, there has been a substantial increase in the depth and breadth of investment products.

How much of a client’s assets should be allocated to generating guaranteed income versus how much should be allocated to long-term investments such as stocks and bonds is the first part of a three-fold assessment.

The process begins with a review of a client’s assets, including life insurance policies. For example, a life insurance policy review can demonstrate the best options for a client. In some cases, they can be sold to more efficiently allocate a client’s assets towards guaranteed cash flow products while eliminating premium expenses. The combination of selling a negative cash flow asset while using the proceeds to generate positive cash flow creates a swing factor in funds flow that can dramatically change a client’s ability to manage their future financial needs. The process ultimately leads to a rebalancing of a client’s balance sheet.

Knowing a client’s life expectancy can assist a financial advisor in redeploying the client’s investment portfolio. For example, it would be useful in determining if an annuity makes sense, since insurance companies calculate the annual amount to pay to each person in an age group based on the predictable mortality experience of a large number of people in that age group. Consequently, annuity contracts are more attractive for people whose present health, living habits and family mortality experience suggest that they are destined to live longer than average.

A person with a long life expectancy may elect to rely on annuities which can provide a source of income that cannot be outlived. Annuities can offer several other advantages including the creation of spending discipline, tax deferred income and judgment protection. IRAs and 401(k)s also provide judgment protection and tax deferral of income, but they fail to create a spending discipline unless self-imposed.

Basic daily expenses can best be secured by utilizing annuities in combination with social security payments. Annuities, a guaranteed cash flow set of products, can be used to meet basic needs, allowing an investor to take a less conservative approach to investing the remaining assets. Additionally, annuities can be made judgment proof, although this will depend on your state of residency and the length of time you own the annuity. For someone dependent upon investment income from a sum of money, this could be an important feature. Moreover, tax deferred annuities can bypass probate proceedings and go directly to named beneficiaries, without any cost or delay.

The last step of the process is to invest the remaining funds to address the risk of longevity and inflation. This means allocating more of those assets toward higher growth, higher-risk investment products that are designed to produce superior long term returns.

Peter Klein is the director of life settlements at Capitas Financial. He can be reached at klein@capitasfinancial.com.