For better or worse, Americans are living longer. Gone are the days when most people retired at 65 and were dead at 72. Today, men and women retiring at 65 can expect to live another 25, 30, 35 or even 40 years — all the while drawing down their hard-earned retirement nest egg.
It is the responsibility of financial advisers to make sure their clients are prepared for the challenges — and opportunities — that come with these extended life spans.
To do that, advisers must take a number of factors into consideration, not the least of which is coming up with a reasonable expectation of how long clients might live.
Properly estimating their life span, then building a conservative financial plan around that assessment, can spell the difference between success and failure in helping clients attain a sound, safe and secure retirement.
Assessing longevity is two parts art and one part science.
For the science, actuarial tables are a good place to start.
The lifespan of a 65-year-old American man increased two years between 2000 and 2014, from 84.6 to 86.6, according to new mortality projections from the Society of Actuaries. Overall longevity for a 65-year-old woman rose 2.4 years in the same period, to 88.8 from 86.4.
In 2010, median life expectancy was 81 for a 60-year-old man and 84 for a 60-year-old woman, according to the Social Security Administration.
That said, there is substantial variation around these medians in the projected age of death.
For example, in 2010, 30% of 60-year-old men could expect to live to 86 and 10% to 92.
Among 60-year-old women, 30% could expect to live to 89 and 10% to 95.
In other words, the chance of outliving the median is high.
But actuarial tables are not enough. Financial advisers should devise a personal life expectancy for each of their clients. That's where the art comes in.
To calculate a realistic personal life expectancy for clients, advisers should question them about their medical histories and personal habits (things such as diet, exercise, smoking, alcohol consumption and regular seatbelt use), as well as sources of daily stress.
Familial longevity is another important component in determining how long a client is likely to live.
Life expectancy calculators may be useful in doing this work, but be careful to avoid those that rely solely on actuarial tables. Look for ones that also take clients medical history and personal habits into account.
There are other important factors involved in making sure clients don't outlive their savings.
Picking the right investment allocation is critical: Invest too heavily in stocks, and your clients' portfolios may become embedded with too much risk and volatility. Load up on securities that are perceived as safe, such as Treasuries or high-quality bonds, and their portfolios may get eaten alive by inflation.
It's up to the financial adviser to find the right investment allocation for each client.
Of course, that allocation should be based on a client's risk tolerance and the amount of money he or she has saved.
Still, considering that most Americans have not saved enough for retirement and are living longer, advisers should be careful about being overly cautious in building their clients' investment portfolios.
Financial advisers must also increase their knowledge of Social Security claiming strategies. For most clients — even wealthy ones — Social Security will play an important role in generating a predictable income stream during their retirement.
With realistic and prudent financial planning, longevity does not have to be a curse.