Q&A: How Financial Advisors Plan for Longer Client Life Expectancy

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Life expectancy in the U.S. has risen through much of the past century, and while this is largely a welcome trend, living longer does present challenges for financial planning.

© (Getty Images) Mature financial advisor planning with young multi-ethnic couple at office. Businessman is discussing over digital tablet with clients at workplace. They are sitting in meeting.

With Americans living into their 90s and beyond, financial advisors need to pay careful attention to longevity planning to ensure their clients have enough savings to sustain them throughout their lives.

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This is complicated further by the fact that this general trend is not evenly distributed across all races. For instance, non-Hispanic Black American males born in 2020 have a life expectancy that is about seven years shorter than the life expectancy for men across all ethnic and racial origins, according to the Centers for Disease Control and Prevention.

We spoke with Eric Arnold, CEO of financial planning platform Planswell, about how rising life expectancy is affecting financial planning and what advisors should be doing to address this trend. Here are edited excerpts from that interview.

What impact has increasing life expectancy had on financial planning?

When my grandmother, who’s in her 90s now, was young, she would have planned to live to her mid-60s. If you died sooner, that would just increase your estate. Major government and company pension plans are based on everyone dying at the same future age, even though there is compelling data that shows certain groups of people are very unlikely to live as long as the average. Those groups pay in their whole lives, often for nothing.

So more people actually living to their planned mortality date is not really an issue. Exceeding it becomes the problem. The big question is: As we potentially increase the upper limit of human longevity from around 100 to, say, 140, what do you do for the extra decades? How do you prepare for that?

How can advisors approach a conversation on increasing life expectancy with their clients?

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It depends on how early their client is beginning to plan. If you have 30 working years left, the difference between a plan that accumulates to retirement and decreases to zero at 95 and a plan that accumulates to retirement and yields in perpetuity is not that big of a difference in savings.

If you’re five or 10 years from retirement, it can be quite a large gap. Then the conversation is likely going to center around supplementing with a part-time job.

What are some tactics advisors can employ to help clients gear up for a longer retirement?

Starting earlier and building a plan that yields your target lifestyle while the principal still grows with inflation is going to be the best bet.

In a world where the upper limits of longevity become a question mark, that’s going to be hard to achieve for a lot of people. The other question is really, how can you earn some extra passive income? Maybe rental income or some kind of hobby you can monetize. The conversation might need to move beyond simply passive investing, and advisors should be guiding their clients there.

What are some of the tools that are particularly helpful for advisors adjusting financial plans to sustain a longer retirement?

The main levers won’t really change. Save more, retire later, lower lifestyle targets, work in retirement, downsize real estate and explore annuities. The one that you’re not supposed to bank on is an inheritance, which will become a lot more uncertain as time goes on.

How does the current state of Social Security, with funds becoming less certain, impact longevity planning?

I know a lot of advisors who prefer to build plans that completely ignore the government entitlements, saying they can’t be trusted.

I’ve always assumed they just lacked the technology to actually calculate it, which is why we built Planswell. But perhaps it’s a reasonable argument. As is the case with all plans, they’re going to be wrong. The key is making regular updates and microadjustments along the way to maximize your ability to achieve your goals.

Copyright 2021 U.S. News & World Report

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