As every advisor knows, life expectancy is a key component of any long-term financial plan, but what age should advisors be planning for?
Ric Edelman, co-founder of Edelman Financial Services, says advisors’ clients will live to be 120 and “aging will become a disease, not a part of life.” Carolyn McClanahan, founder of Life Planning Partners in Jacksonville, Florida, and a family physician, starts with the premise of 100 but doesn’t worry about any particular number if a client has plenty of money to last throughout their lifetime.
Financial planners generally use a number somewhere between 90 and 100 as a base case, making adjustments for a client’s health, including whether they’re a smoker or nonsmoker, the health history of close family members and current health care costs.
According to the Social Security Administration, the average 65-year-old man can expect to live until age 84.3 and the average 65-year-old woman can expect to live until 86.6 years. The agency publishes actuarial tables on life expectancy and has a life expectancy calculator that lets individuals plug in their birthdates and gender to find their life expectancy, but none of these take into account a person’s health and family health history.
“The idea of picking an age [for life expectancy] sounds good but you may be telling clients to spend less than they can afford to, or more,” says Harold Evensky, president of Evensky & Katz/Foldes Financial Wealth Management, with offices in Miami and Lubbock, Texas.
He and other financial advisors note that actuarial tables yield numbers with only a 50% probability, meaning that they could be wrong half the time, which is why advisors need more specific information about their individual clients and sophisticated software systems in which to plug in that information. Many advisors also run multiple mortality tables.
With that in mind, Scott Bishop, executive vice president of financial planning at STA Wealth Management in Houston, Texas, says he asks clients about any significant health issues they have, about how long their parents or grandparents lived or their current age if they’re still living and about how long the clients expect to live. Then he runs analysis using multiple life expectancy ages and what he calls “what-if runs,” especially if the client is just moderately wealthy and could potentially run out of assets.
He and other advisors do this for both spouses when working with couples.
Another resource for advisors is livingto100.com, which asks many questions about clients’ vital stats and medical histories in order to calculate their life expectancies.
“Think about who your clients are,” says Geoffrey Sanzenbacher, associate research director of the Center for Retirement Research. “If they’re higher income they will likely live longer than the average. … Know how much they spend on out-of-pocket health costs as they get older. … If they don’t smoke, are educated, have a higher income and are in good shape, they will likely live longer than average.” It’s also important to know the age gap between spouses and plan for that, says Sanzenbacher.
But even after learning all this information and plugging it into a software program, there are no guarantees that a client will not outlive his or her savings.
“The only thing that can guarantee that you don’t have to dip into savings is to keep working,” says Sanzenbacher.
“Your safest asset is your ability to work,” says McClanahan. “Instead of saving for the day when they won’t work, people should work as long as possible at jobs they love.”
Last year McClanahan, along with Chris Heye, co-founded Whealthcare Planning, a software platform for advisors that helps advisers address current and potential financial and health-related needs of clients, including who’s paying the bills (financial caretaking), cognitive issues (a risk profile for potential diminished capacity) and transition planning for lifestyle changes (proactive aging program). There are three questionnaires that take about 15 to 20 minutes each for clients to complete. “Nobody loves it but everyone is glad they’ve done it,” says McClanahan.
Last week Raymond James launched a suite of longevity planning resources to help its 7,300 financial advisors guide clients through challenges associated with longer retirements.
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