How to plan for a long life for your clients.

In the good ole’ days, it was common to work for one company your entire career and retire with a lifetime pension. With a pension plan, Social Security and a little bit of savings, retirees could live comfortably during their golden years. The risk of living a long time was borne by the company (pension plan) and the federal government (Social Security).

However, during the 1970s and 80s, the defined benefit pension plan began to die a slow, agonizing death. Although most public employees still have such a pension, the majority of private-sector workers do not. Without a pension, the individual bears a greater responsibility to invest for their retirement. Individuals also face the risk of outliving their money, which brings us to our topic, increasing life expectancies. 

In this article we’ll explain precisely what life expectancy means, discuss its importance in planning for retirement and look at a few statistics for the world at large as well as the United States. Finally, we’ll conclude by exploring ways that we, as advisors, can help our clients navigate the choppy waters of retirement. 

Life Expectancy: Definition and Importance

Life expectancy may be defined as the number of years a person is expected to live beyond their attained age. However, there’s a bit more to it than that. For example, if everyone in the country lived until age 70, but 25% of all births resulted in death (i.e. infant mortality), the life expectancy might be around 37 years. In this case, if you consider the life expectancy of everyone at age five, it would be 65 years. My point is that life expectancy can be skewed by a number of factors. 

Here’s another example to consider. A 40 year old today has a life expectancy of 43.6 years (until age 83.6). Individuals who are 84 today have a life expectancy of 8.1 years (until age 92.1). Therefore, if your client is 40, it’s not enough to plan for the money to last until age 84. We must plan for an age beyond this. Hence, life expectancy is one of the most important assumptions in the planning process. 

Just last month, the National Center for Health Statistics reported that average life expectancy for Americans aged 65 as of 2012 had risen to 19.3 years—20.5 years for women; 17.9 years for men. 

Although many are uncomfortable discussing death, it’s a conversation that needs to happen. Projecting the number of years an individual will need to withdraw from their portfolio is critical. How do you handle it? Do you use life expectancy? Life expectancy plus X years? An arbitrary age, say 95? While we’re pondering this issue, the client may be wondering, “How long will I live?” and, “Will I run out of money?” What age should you use regarding this issue? Perhaps a few statistics will help.

Global Overview

Japan has more centenarians (those who are 100 years old or older) per million of total population (347) than any other country. In fact, the Shimane Prefecture of Japan (located on the northern shore on the western part of Japan) has an estimated 743 centenarians per million. The U.S. has about 232 per million in this club as of November 2010.

Life Expectancy in the U.S.

The U.S. ranks 30th in the world in life expectancy. The longest life expectancy is found in Asian-American women at 85.8 years. African-Americans have a life expectancy of 75.1 years and white Americans of European ancestry have a current life expectancy of 78.9 years.

Life expectancy is affected by many factors. The following table includes most of the major factors. 

Factors Influencing Life Expectancy

Factor

Comment

Affluence

Greater affluence = longer life expectancy

Diet

A better diet is more likely to increase your life expectancy

Lifestyle

Smoking, excessive drinking, drug abuse, exercise, etc.

Infant Mortality

The number of deaths at birth

Child Mortality

The number of deaths of children

Environment

Air pollution, water quality, excessive sun exposure, etc.

Occupation

Increased stress = reduced life expectancy

Marital Status

Married people live longer

Gender

Females outlive males

Genetics

Family history of various diseases, longevity, etc.

Economic Conditions

The strength or weakness of the economy

Obesity

Weight exceeding the normal range on weight and height table

Access to Healthcare

Better access = increased longevity

Education

More education = longer life expectancy

Several studies have established a link between increased stress and reduced life expectancy. One study in particular, conducted by Granados and Roux at the University of Michigan, discovered that life expectancy actually increased during the Great Depression and during recessions and depressions in general.

The reason? People work harder during good economic periods which raises stress, increases the exposure to pollution and the likelihood of job-related injuries. This may explain why the highest concentration of centenarians are in a rural area of Japan which happens to be the second least populous area of the country. Fewer people equates to a more relaxed environment and less stress. 

In America (and elsewhere), women tend to live longer than men. For example, 90% of all individuals age 110 are women and stress (or lack thereof) may be a factor. Consider this. In 1979 the life expectancy of women exceeded men by about 7.8 years. By 2005 this gap had declined to 5.3 years. Why? In 1979, women comprised 47.5% of the labor force. By 2011 this had risen to 53.2%. The percentage of working women had increased which created greater stress. What can advisors do with this information? 

What Now?
Advisors provide advice. To do this well we must understand the subject. Increasing life expectancies are raising the risk of some of our clients running out of money. Therefore, we need to be educated about it to help clients plan for the possibility of living a long life.

There are a number of things we can do to help. We can educate our clients on this trend; learn how the factors in Table A above may apply in their situation; and utilize some helpful tools to calculate their life expectancy. I would also recommend reading, “Conserving Client Portfolios During Retirement,” by Bill Bengen, CFP. He is the financial plannerl who brought us the “safe withdrawal percentage” years ago. 

Here are a few links to some good life expectancy calculators. 

Living to 100

Living to 100 is based on the New England Centenarian Study, the largest study of centenarians and their families in the world. Dr. Thomas Perls, M.D., is the founder and director of the study, which includes a series of 40 questions along with personalized feedback and a to-do list. 

The Vitality Compass

This calculator is touted as the most accurate and includes up to 12 customized recommendations to help you live longer. This was created in collaboration with the University of Minnesota’s School of Public Health. 

Minnesota State Retirement System

This includes a series of questions which require you to add or subtract points as you proceed. Then, after the final question, you will have your life expectancy and can compare the results to a chart with the life expectancy of the general population (by gender). 

Life Expectancy Calculator

This relatively straightforward life expectancy calculator from the University of Pennsylvania’s Wharton School includes 40 questions on a single page. 

Although this may be an uncomfortable topic with clients, it is extremely important. Most of us probably know clients who are concerned about running out of money. It’s up to us to help them design a plan and implement it to avoid this possibility.

In my practice I use Monte Carlo simulation to forecast the probability of running out of money at ages 75, 85, and 95. In addition, all projections in the plan extend to age 100. Here’s my rationale. If you can make it to 100, you can make it to 90 or 80 or any age prior to 100. Using this approach, the client is free to focus on any age they desire.

Considering the advancements in medicine and technology, I envision a day where we will be able connect the client to some tool which will be able to calculate the age of death (excluding accidents) with an acceptable degree of accuracy. However, if we had this capability, would we want to know the answer?