As tech companies crowd their territory, banks are exploring ways to understand customers on a deeper level and create personalized… Read More
Longevity Planning: Helping Your Clients Prepare for a Longer Future
• Matt Rogers • August 17, 2023
Longevity has always been a key consideration in financial plans. It is important for planners to help clients seriously consider the possibility of living longer than they may expect. This is especially true in today’s age, where life expectancies have been gradually increasing for decades.
The Social Security Administration estimates that about one out of every three 65-year-olds today will live until at least the age of 90, and one out of seven will live until at least age 95.1 And for married couples, the chances that one of the two spouses will reach any given age is higher than either person’s single likelihood. Many clients overlook this couples dynamic to life expectancy.
Consider: You flip a coin and have a 50 percent chance of heads. Your spouse flips a coin and also has a 50 percent chance of heads. But together, the odds that one of them flips a head is 75 percent. With this in mind, your clients who are preparing for retirement should consider the possibility of living through their mid to late 90s.
This increased life expectancy brings new challenges to consider, including increased health care costs, inflation, and a greater risk of outliving retirement savings. As a result, talking about longevity with your clients and leveraging technology to analyze longevity risk has never been more important.
Discussing Longevity with Your Clients: A Necessary Conversation
The topic of longevity will likely come up naturally in your conversations with your clients, since the question “Will I outlive my money?” is a common worry that people have. But if your clients do not bring the topic up first, you can address it as you educate them on the key assumptions you will make as you develop their plan.
This can be as simple as explaining to a couple, “We don’t want to assume that your need for money will end at an age like 86 even though that is statistically defendable for any one person. When we make your plan, one of the assumptions we will make is that at least one of you will be living into your 90s.” (Or whatever age makes you comfortable as an advisor creating the plan.)
As you talk with your clients about this topic, there are some questions you can ask to refine your assumption of their lifespan. You don’t need to pry for specific medical information, but the answers to general questions such as “Did your parents live a long time?” and “Is there anything unique about your health that may affect how we build your plan?” can be helpful as well as provide some information that could be useful to know for planning purposes even beyond just the life expectancy decision.
In addition, it is important to address the challenges that living a longer life can bring. The time will come when the traditional and enjoyable aspects of retirement are no longer feasible. While it can be uncomfortable to discuss the concept of immobility and age overtaking us, and how that could change your financial strategies, it is a necessary discussion to have.
The hidden costs of a long life, such as life-sustaining medical care and living assistance, can have a detrimental effect on one’s finances. Ask your clients to consider how they would like to live in their late age in both ideal and non-ideal health circumstances. These lifestyle considerations will support the development of a strategy for how their wealth will be used to sustain them during the years that exceed the traditional retirement timeframe. These questions and conversation are typically unnecessary when clients first retire but come into play as clients move into their 80s.
Asking these questions too soon is like asking a 32-year-old what they want out of retirement. They can’t imagine it yet. But as clients age, the clarification of these issues becomes key. Perhaps the clients have a friend in a senior facility and they start getting a feel for what they would want in a facility if it ever became needed. Perhaps they are thinking about guaranteed income from annuities. Perhaps their family has started making plans for the children to house them, which can completely alter the financial situation.
It is all about asking the right longevity questions at the right time.
Leveraging Monte Carlo Methods to Build Your Clients’ Confidence
The top concern for people in retirement and preparing for retirement is outliving their money.2 Monte Carlo simulations are a powerful tool that you can use to give your clients a sense of security in their financial plan and confidence that they will achieve their retirement goals. Using a Monte Carlo analysis, a financial professional can project a client’s retirement through a specific age and show a plan’s probability of success at that age.
A traditional Monte Carlo simulation offers a single probability of success at a single pre-determined age. However, if you show your client the analysis for a single age, such as 90, they will inevitably ask: “But what if I live to 95? Or 100?” Rerunning the analysis for multiple end points is not only inefficient and time-consuming for the advisor, but also doesn’t provide an insightful visual for how quickly the client’s plan weakens as they age.
Newer approaches to reporting and visualizing Monte Carlo results can overcome these shortcomings and provide planners with more actionable information. One such approach is a Monte Carlo longevity risk analysis, which offers a plan’s probability of success at every client age in an easy-to-digest chart form. This reveals important trends about the plan’s probability of success over time and shows how sensitive the client’s plan is to longevity risk.
In addition to providing the advisor with powerful insights, this analysis makes it easy for clients to see how the likelihood of being able to meet their goals decreases the longer they live. Based partly on how quickly that bar chart drops in the later years, planners can then take this information and determine whether adjustments need to be made to the plan immediately, or if they can wait five to ten years and see how things go. With these actionable insights at hand, clients will feel more confident in the success of their plan, even as they consider a longer future.
Prepare Your Clients for Longer Lives
Planning for longevity is a tricky, but necessary, discussion to have with your clients. The trend of people living longer will only continue to amplify client concerns about outliving their money. By discussing the topic at different points in your client’s lifetime and leveraging tools like Monte Carlo simulations to help your clients feel secure in the success of their plans, you can help them feel confident in their future.
To learn more about the Monte Carlo methods we discussed here, watch our webinar on the evolution of Monte Carlo. We’ll delve deeper into how this type of analysis has changed, as well as how you can leverage the latest iterations to your advantage.
1. “Retirement Information for Medicare Beneficiaries.” Social Security Administration. January 2023. https://www.ssa.gov/pubs/EN-05-10529.pdf
2. The Cerulli Edge U.S. Retirement Edition. Cerulli. 2023.
DISCLAIMER: The eMoney Advisor Blog is meant as an educational and informative resource for financial professionals and individuals alike. It is not meant to be, and should not be taken as financial, legal, tax or other professional advice. Those seeking professional advice may do so by consulting with a professional advisor. eMoney Advisor will not be liable for any actions you may take based on the content of this blog.
You may also be interested in...
Building a complex financial plan can require a lot of back-and-forth between you and your clients. From gathering important documents… Read More
Across the wealth management industry, there’s been heightened interest in the idea of holistic financial planning. That is, financial planning… Read More