Longevity plagues financial planning

NEW YORK — “Four score and seven years” may soon be more recognizable as the typical baby boomer life span than the start of a famous speech.
For a 65-year-old couple, there is an 85% chance that at least one of them will live past 85, according to the Society of Actuaries in Schaumberg, Ill.
One key to a happy old age is having enough money to finance it, advisers agree. Some use annuity products with income guarantees, while others use bond laddering, diversified stock portfolios and other methods.

“Longevity is the lens that magnifies all retirement risks,” said Garth Bernard, vice president of the retirement strategies group for New York-based MetLife Inc. In the distribution phase, time is the enemy, he added.
“Clients smile when I run financial plans that go to age 90,” said Bruce Brinkman, a financial planner with Timothy Financial Counsel Inc. of Wheaton, Ill. He does not know whether they smile at the prospect of living to a ripe old age or because they think his life span assumption is comical.
Clients underestimate their longevity because they think of how long their parents and grandparents lived, without factoring in changes in medical knowledge, said Tom Davison, principal of Summit Financial Strategies Inc. in Columbus, Ohio.
Healthy and wealthy
There appears to be a correlation between wealth and longevity knowledge.
“The rich expect to live long,” said Alan Meltzer, chief executive of The Meltzer Group in Bethesda, Md. “They anticipate living into their late 80s and take very good care of themselves,” he added.

Mass affluent and mass market clients usually are more surprised to learn of their probable life span, advisers said.
“The real shock for that group is not longevity but the money they have to save and the potential effects of inflation,” said Todd Bramson, senior partner of Minneapolis-based North Star Resource Group.
Advisers are being assisted in vanquishing longevity risk by a steady stream of insurer training and products.
ING U.S. Financial Services in Atlanta is conducting “income symposiums” at which the longevity issue is front and center, said Mike Buchholz, senior vice president of annuity distribution for the independent channel. About 6,000 advisers have attended the approximately 100 three-hour symposiums so far, he said.
The Hartford (Conn.) Financial Services Group Inc. soon will launch an educational campaign called Past the Summit to train advisers on how longevity affects retirement planning, according to John Diehl, senior vice president and director of the retirement solutions group.
“Coming down the mountain can be much more challenging than the ascent,” he said.
A recent possible retirement income solution — longevity annuity — is receiving mixed reviews. Clients’ savings provide the retirement income between ages 65 and 84, with the annuity kicking in from age 85 onward.
The Hartford’s longevity annuity pays a 65-year-old who invests a $23,750 lump sum $1,000 a month for life starting at 85.
The annuity generally has no account balance until the client reaches 85 but may pay a death benefit.
MetLife’s longevity annuity pays a death benefit equal to premiums plus 3% interest if the client dies before 85, Mr. Bernard said. Payments can start earlier if the client runs out of money — but at a price. “There would be a 40% haircut for starting income payments five years earlier,” he said.
John Hancock Financial Services Inc. in Boston is developing a longevity annuity, according to chief executive John DesPrez.
Some advisers and insurers question the value and marketability of the annuity.
“I’m not using longevity annuities,” said Bill McLarty, president of Money Minders Financial Planning Corp. in Mobile, Ala. “A conservatively managed lump sum can outperform most annuities, with less damage to principal.”
“Clients like investments that are flexible and revocable. This annuity doesn’t sound like it would be attractive to them,” Mr. Bramson said.
“Annuities are all about math. I’d have to review the costs and fees before recommending it,” Mr. Meltzer said.
Tough sell
“The annuity makes sense from an economic viewpoint, but it seems to me that few clients would be willing to invest a large lump sum for the promise of payments so far in the future,” said John Carter, president of Nationwide Financial Distributors Inc. in Columbus.
“From what I know, sales of the product are low,” he added. Nationwide does not offer that type of annuity, Mr. Carter noted.
“People don’t want to lose control over their money for 20 years. That’s a big mental hurdle to overcome,” said Rob Grubka, vice president of the individual-variable-annuity business for Philadelphia-based Lincoln Financial Group.
The same goal — ensuring an income stream at age 85 and beyond — can be achieved by using variable annuities with guarantees, he said.
Lincoln is monitoring the market for longevity annuities but has not decided whether it will enter it, Mr. Grubka added.
Another critical longevity risk is the need for long-term care, which can be a “retirement income destroyer,” said Mark Doherty, Lincoln’s second vice president of product manufacturing.
That risk can be handled through LTC insurance or hybrid products that offer nursing home, assisted-living and other LTC benefits in a life insurance chassis, he noted.