New data suggests that although people around the world are living longer, most of us are spending more of that time dealing with illness and disability. As a result, financial advisors need to be extremely cautious about the financial planning projections used with clients.
Use the wrong ones and your clients run out of money prior to death, a situation nobody wants to face.
Assante Financial Management advisor Glen Rankin has a simple solution that will better ensure clients are able to take care of their ongoing living expenses while also providing their loved ones with an inheritance or legacy.
“Life expectancy is what people tend to look at. Half the people are going to live shorter than that and half are going to live longer than that. You can’t deal with life expectancy at birth. You have to look at the life expectancy at retirement date,” says Rankin. “If you look at that you’re going to get a much longer number than if you’re looking at life expectancy at birth.”
The average person who’s 65 today has a life expectancy of 16 years if you’re a man and 20 years if you’re a woman. That doesn’t mean an advisor should plan for a 20-year retirement because there’s a 50% chance that your 65-year-old client is going to live longer than that.
“Why would we plan for a probability of 50% that we’re going to be alright?” asks Rankin. “So, we want to make sure that we’re using a date at which there’s a 90% chance you’re not going to need any more money.”
Planning horizons, not life expectancy, is the best way to ensure clients don’t run out of money says Rankin.
“When you look at planning horizons if you’ve got a 65-year-old man it moves that number to about 91 and also moves that number for a woman to about 95,” Rankin says. “If you create a plan with these numbers in mind than you’re going to be about 90% sure, assuming your other variables are correct, that they’re going to be alright.”
The net effect of using planning horizons instead of life expectancy is that you accommodate approximately 10 years of additional expenses for clients ensuring their quality of life at a time when they most need it.
“If you’re wrong [using planning horizons] than they have too much money,” says Rankin. “Whereas using life expectancy and you’re wrong they run out of money.”