We all know that Americans are living longer than in generations past and that this impacts retirement planning. An ongoing debate rages about how much money is needed for retirement, at what age we should start taking social security benefits, and when or if we should retire at all.
How long we will live is, of course, a great unknown. Many clients don’t like thinking about it, but it has a tremendous impact on how we should plan and how much needs to be saved. Yet even though we likely haven’t considered exactly how long we will live, companies that manage retirement dollars have and so has the government which oversees our social security payouts. And guess what, they may have it all wrong.
First, some statistics on longevity in America which may surprise you.
- Since 1900, the average life expectancy has increased by 31 years, so the average American can now expect to live past age 78.
- The number of Americans 100 or older has risen by an astounding 2,200% since 1950. More than 53,000 centenarians call the United States home.
- 47% of baby boomers are at risk of outliving their retirement savings.
And if medical advances continue to add to overall longevity, it will have a crushing effect on the economy and individual savings efforts:
- It’s estimated that every year increase in average longevity costs the U.S. private pension system more than $115 billion dollars.
- If lifespan increases four years over current projections, a retiree will need to save an additional $160,000.
The figures are scary and give us further reason to get a better handle on the longevity of our clients.
How can you know how long a client can expect to live? How does the government “know?” Perhaps you have seen figures from an insurance company or financial services company that have provided a life expectancy estimate. Here’s the most important thing to know: Any calculation that hasn’t received direct input from the individual, such as medical and lifestyle details, is an average.
And these averages can have a wide variance. In fact, if you visit the social security website and calculate your age, you will receive one life expectancy calculation for today and another for when you reach age 62 and even another for when you reach age 70. The government can’t be sure, so they give you a wide range of averages – or put more bluntly, they give you guesses.
If you check out Northwestern Mutual’s life expectancy calculator, for example, you will find more detailed questions about your overall health, exercise habits, nutrition and family medical history. As you go through the questions, your prospective age is posted in the upper right hand corner of the screen and your life expectancy goes up or down based on how you answer. If you smoke, expect the number to drop. If you exercise regularly, watch it rise, for example.
One of the most detailed life expectancy calculators was created by researchers at the University of Pennsylvania. It asks very detailed questions about your health, stress levels, family medical history and other factors such as how many miles you travel per year and whether or not you wear a seatbelt while driving. I found this to be the most believable calculator, primarily because it uses many data points that I can verify, because I’m the source of the information.
In the life settlement industry, calculating life expectancies is a critical part of our business. We have built our own models, and believe me, we incorporate significantly more data than the traditional calculators. Our life insurance policy evaluation tool, called Life Pass, uses some of this technology. Understanding longevity, whether you are selling an annuity or evaluating the sale of life insurance policy, remains critical to wealth planning.
Once you have a better understanding of how long your client will live, then you can properly plan. How much you will need can’t be realistically projected until you have a good idea of how long they will live.
Life expectancy is something of a creepy topic but it is a necessary evil when planning for your client’s future. Understanding that important parameter in the retirement planning equation will make it easier to plan for the future and secure a healthy retirement.
Calculators
http://gosset.wharton.upenn.edu/mortality/perl/CalcForm.html
http://media.nmfn.com/tnetwork/lifespan/#0
http://www.socialsecurity.gov/cgi-bin/longevity.cgi
Stephen E. Terrell is Senior Vice President of Market Development and Branding of The Lifeline Program, a life settlement provider based in Atlanta, Ga. For more information, call 770-724-7300 or visit www.thelifeline.com. You can also follow him on Twitter @LifelineProgram