An Age-Old Problem

Art by Tilda Rose

“When do you expect a given client to die?” asked David Blanchett, head of retirement research at Morningstar Investment Management, in a recent Retirement Experts Network webinar. “I’ve looked at the data and I can say confidently that this is one of the most important assumptions you will factor into any financial plan.” Evidence indicates that the advisory industry makes these assessments poorly, he said. “[This] has a direct bearing on the quality of the financial plans being delivered to clients.”

The concept of life expectancy itself could be better understood, he observed. “The actual definition of life expectancy is the average number of years a person can expect to have left to live, on average, at a specific given age. This is a nuance that’s important for advisers to understand.”

Blanchett cited the example that a newborn baby boy’s life expectancy today, in the U.S., is about 76. However, for a healthy 65-year-old male, the figure is approximately 83. “This is a really interesting feature of life expectancy as a concept,” Blanchett said. “In essence, as people get older and approach the ‘normal’ retirement age, their life expectancy increases. At the same time, life expectancy improvements have been very steady over the last century, which has been remarkable. It’s projected that, by 2100, a person could expect to live to twice as long after 65 as they would have in 1900.”

Therefore, he said, retirement plan advisers and wealth managers need to understand this dynamic. “As an adviser, you basically have this effect where the younger and healthier your clients are on average, the more you can expect their life expectancy to increase over time and to be greater than existing retirees,” he said. “We absolutely must factor such things in to the actual development of people’s financial plans.”

He also stressed doing an honest assessment of a given client’s lifestyle and health while working on the person’s financial plan. Advisers often assume such factors will only moderately affect the financial plan’s success, but the impact can be huge.

“Consider the effect of a behavior such as smoking,” Blanchett said. “The data show this is one of the biggest factors for your clients’ longevity. Also, those with a lot more assets live a lot longer than those with a lot less. I’m speaking to advisers here, and I can say pretty confidently that your clients will very likely be people with more money and more assets. The conclusion is that we may not be accurately projecting people’s retirement arc. We might expect a given client to live to 83, but they could live 10 or 15 years longer, which will have a big impact on the plan.”

Blanchett pointed to an approximately 14-year difference in life expectancy for a smoker who is in poor health versus a nonsmoker in excellent health. “Incorporating this information is central to defining an appropriate expected retirement period,” he said.

“There is a huge educational opportunity here for advisers. If you don’t do this work, your clients won’t understand how much they need to save, how much they can spend and how long they can expect to enjoy their retirement.”

One other key factor is the start date of a person’s retirement. “The data show that people tend to retire about four years before they planned to,” Blanchett said. “Obviously, that gap can significantly derail any plan and can really damage people’s standard of living in retirement. One basic rule of thumb is that people who expect to retire over the age 61 will retire earlier than planned, and the further out their expected retirement date is, the bigger the gap between the actual and expected retirement dates.”