How do advisers estimate a client's longevity?

Advisers have a wide range of approaches, with some defaulting to age 90 and others going past age 100

Jul 18, 2019 @ 3:31 pm

By Greg Iacurci

Estimating how long a client will live is an inherently challenging, yet critical task for financial advisers. Lifespan is at the heart of every financial plan, and a misstep could mean the difference between clients' financial security and running well short of money in retirement.

The task is fraught with difficulty, from knowing what questions to ask clients, to bundling that information into an age projection, to even engaging in a conversation that could skew awkward. Indeed, client longevity is advisers' top retirement planning concern, according to InvestmentNews data.

"We financial planners are woefully underequipped to figure out how long a client is going to live," said Chris Chen, a financial planner at Insight Financial Strategists.

"The reality is that most physicians have trouble with that," he added. "In fact, even actuaries who may have the best demographic data are unable to decide how any one individual will fit in their predictions for a population."

(More: The longevity paradox)

The variance in how advisers approach the issue underscores its troublesome nature.

Financial planning software generally estimates a client will live to around age 90, since there's a 50% chance of a 65-year-old couple having at least one spouse live to 90, said Dennis Nolte, a financial planner at Seacoast Bank. Mr. Nolte typically plans for clients to live until at least 91 or 92.

Scott Bishop, executive vice president of financial planning at STA Wealth, uses roughly the same default — age 90 for the youngest person in a married couple.

But other advisers are much more conservative.

Marianela Collado, a senior financial adviser at Tobias Financial Advisors, primarily recommends planning to age 100, unless family medical history and longevity suggest an alternate course. Ken Waltzer, co-founder and managing director of KCS Wealth Advisory, mostly falls in a range between 99 and 104, erring on the longer side for younger clients in their 30s and 40s.

"What is the risk you're planning for? You're planning for the risk they'll live too long," said Mr. Waltzer, a former physician. "And there are more and more people living over age 100."

(More: The challenge of the longer lifespan)

Indeed, increasing longevity has been a challenge not only for financial advisers. Many employers sponsoring pension plans and long-term-care insurers, for example, have struggled to meet their financial obligations as longer lives have stressed their ability to provide benefits. Such institutions use actuarial tables gauging the life expectancy of populations, not individuals, a strategy that could prove dangerous for advisers.

"It's important to remember that when we hear one's 'life expectancy' is a certain age, it means half of people like you will die before and half will live past," said Katherine Fibiger, a partner and wealth adviser at Stratos Wealth Partners. "Obviously we don't know on which side one will fall, but most people tend to underestimate their life expectancy, which is more dangerous than the reverse."

Advisers say trying to exactly pinpoint the age at which a client will die is a fool's errand — it's more of a ballpark estimate than something the client should expect. But there is information that could prove useful in guiding a rough projection, which is how long the client's parents and grandparents lived.

Estimates become a little easier when a client has longevity in their family, Ms. Fibiger said. If a grandparent or parent lived into their 90s, for example, she extends the age in the client's financial plan by five years. Ninety percent of her financial plans assume age 95.

It's tougher to gauge for those without a history of longevity among their family members, Ms. Fibiger said. For those whose family members didn't live past their 70s, she may opt for a projection of age 85 — but will still show a financial projection to age 95 so the client understands what a longer life would mean for his or her portfolio.

Mr. Waltzer typically only alters his baseline longevity assumptions if a client has a chronic disease, the major ones being severe heart disease and metastatic cancer. In the case of major heart disease, for example, he might reduce the client's life expectancy to 10 years. For milder heart disease, he may cut 10 years from his original assumption.

Other diseases such as Alzheimer's can be tricky, Mr. Waltzer said, since they shorten life expectancy but may also increase long-term-care costs and could therefore end up being a "wash."

A shorter life isn't always a given, either, he said, noting that a client's parent who had Alzheimer's recently died at age 103. And shortening one person's lifespan in a couple may not significantly improve their success rate, as the spouse may live a full lifespan, he added.

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