Important good news
By Ed Morrow
Intl. Assoc. of Registered Financial Consultants
Not only are we living longer, we are living much better. The Life Expectancies in the 20th Century chart indicate the incredible increase in U.S. life expectancy from 1900 to 2001. This trend is also matched in other countries, to a lesser or greater extent. There are many reasons for these increases in lifetimes:
- Sanitation is much better
- Many diseases have been eradicated
- There are fewer occupational deaths
- Surgery solves many ailments
- Medicine solves or delays many conditions
- There is more and better food production
(From CIA World Factbook)
China's life expectancy may be low because of pollution and industrial deaths -- it's certainly not genetics, because in Macau the life expectancy is 84.33. Imagine the population and economic difference that longevity increases will make in China and India alone. In some countries, the life expectancies are fairly similar for men and women, but in Russia, for example, the difference is enormous: men live to 59.0 and women live to age 72.6.
Understanding the numbers
We tend to think that longevity or life expectancy means that if you were born today, you would live a certain number of years. But that is not what it means. Life expectancy means that, for example, for every male child born in the U.S. in 2001, we can expect that 74.4 years later, half of those born then will still be living. Many will live into their 90s, and a surprising number will become centenarians.
A person born in the U.S. in 1940 would have expected that when the time came for his or her 50th high school reunion in 2008, that less than half would be able to attend; however, almost 70 percent are still living! And judging from those on the dance floor, many are in darn good shape.
When Social Security was established in 1935, it was anticipating a life expectancy of less than 60 years for male workers, which comprised the bulk of the workforce. A normal retirement age of 65 therefore assumed that a majority would never receive any benefits. It has been estimated by The Cato Institute that in 2012, more will be paid out by Social Security than is coming in to the program from withholdings and employer contributions. This will mean either a sharp curtailment in benefits, significant delay in eligibility, higher taxes or all three.
Impact on planning
You cannot assume your clients will live forever. That is unrealistic, and when you factor in a consistent inflation rate over a 40- or 50-year period, the numbers become unbelievable.
You cannot plan for death occurring at life expectancy. That would be foolhardy, since more than half will live beyond that date, and many for much longer.
You cannot use out-dated statistics. Which life expectancy tables would you use? Those from 1940 or 1960? Those from today? Or maybe you should predict continued improvements.
Does retiree spending match general inflation? Should you assume clients will be less active and spend less, or have greater medical care and lifestyle help requirements?
How many years should you plan for? This is a major issue, and the truth is that you need more information. A retiree does not care about the statistics that apply to other persons of their same age or economic class, they care only about themselves. In other words, "Do I have enough to live the way I want to?"
Shifting from the population to the person
What you must do now, as a caring and conscientious professional, is establish a realistic assumption based on each client's longevity. But you aren't a doctor, and even if you were a licensed physician, you might have no idea, since most are specialists in fields other than gerontology. Physicians treat the ailments of patients, they do not prognosticate on how long they might live.
How do you get this information? If a younger client was applying for life insurance and was issued a standard or preferred policy, you would know that some insurance underwriters have confidence in them. But that does not tell you how long your client should be planning for.
You need a Medical Monte Carlo Analysis. You know that investment performance expectations can be evaluated using a technique that involves using random numbers and probability. This can be applied to a variety of risk analyses. But your client wants to know how long he or she might live, not what may apply to society in general. This requires an evaluation of their health records and status.
Are you ready to probe your client's health issues? The answer is probably, "no"! Furthermore, many clients would not feel comfortable conveying their history and current treatments to their advisor.
You need more understanding. This article is designed to get you thinking about this issue, but it cannot solve it for you. You need to face this all-important issue and acquire more knowledge and understanding. Longevity will have a big impact on your family, on yourself and on all your clients.
You need to have empathy for this issue. The only way to have true empathy is to go through the process yourself. Go through an interview with a longevity underwriter and personally experience the questioning. And then you must read your own report and test your reactions to the good or bad news.
Shouldn't you offer clients a customized longevity planning report?
Professional risk analysis. Do you run a risk if you offer this service? Do you run a risk if you do not offer it?
Can you pass the costs of this on to your clients? If so, how can you broach and handle the subject? Should you suggest a periodic reappraisal, perhaps every three or four years?
How do you use the report in your planning? Do you use life expectancy at 85 percent or 90 percent? How well do you and your clients understand the longevity curve?
How do you handle this critical information in client interviews? This is sensitive stuff! Your client may not like the news, and you do not want to be regarded negatively while you are trying to be a conscientious advisor. Even when the results are negative, how can you put a positive light on them?
A little introspection
Please ask yourself, "How would I respond if I was to learn that my personal life expectancy is a lot less than that of others my age?"
"If I were planning for my parents, how could I open this discussion, and how would I handle the delivery of the numbers and the impact?" For example, what if your mother's expectancy is three years, but that of your father is 11 years, meaning he is likely to outlive her by eight years?
"If my clients run a serious risk of outliving their money, how will I help them reduce their expectations and spending if that is the only solution?" "What if that applies to me?"
The good news
You can handle these issues. I know thousands of financial advisors and life agents and by an enormous majority, they are caring and conscientious people. Those characteristics will help turn the discussion of longevity into good news from a business perspective, but more important to all of us, from the standpoint of helping clients achieve and maintain financial independence. As a financial advisor, you help fix the financial issues, but a longevity report may stimulate them to maintain better lifestyle habits for an even longer and better life.
|1900||46.3 years||48.3 years|
|1910||48.4 years||51.8 years|
|1920||53.6 years||54.6 years|
|1930||58.1 years||61.6 years|
|1940||60.8 years||65.2 years|
|1950||65.6 years||71.1 years|
|1960||66.6 years||73.1 years|
|1970||67.1 years||74.7 years|
|1980||70.0 years||77.5 years|
|1990||71.8 years||78.8 years|
|2001||74.4 years||79.8 years|
Source: National Center for Health Statistics, U.S. Department of Health and Human Services