A common concern many individuals have when contemplating retirement spending is that they may live longer than expected and thus risk outliving their money. This sentiment can lead advisors to build financial plans based on the conservative assumption that clients will live a very long time. Yet, while a longer plan will extend the longevity of the portfolio, it also relies on lower annual portfolio withdrawals. For couples, it becomes crucial to consider other income sources, such as Social Security benefits, annuities, and pensions, that may be reduced or eliminated when one spouse dies. The loss of these additional income streams by one spouse can create a significant mortality risk for the surviving spouse, potentially leaving them with less income than expected. Which means that plans that anticipate both members of a couple living to the same (very old) age might overlook the mortality risk of one spouse dying earlier than planned, which can significantly influence the surviving spouse’s sources of income and overall financial situation.
To manage these potential outcomes, advisors can use a more rigorous process to account for and manage both longevity and mortality risk. For example, advisors can calculate a client’s spending capacity using expected mortality-adjusted cashflows to manage mortality risk. Rather than giving a plan ‘credit’ for all non-portfolio income that would be received if clients live to their projected date of death, advisors can instead average out the non-portfolio income that a couple would receive across a wide range of mortality assumptions based on statistical probabilities that treat death as variable and uncertain. Using a comprehensive approach to examine a client’s mortality risks can be an opportunity for the advisor to highlight potential pain points and vulnerabilities and offer clients a strategy to plan for them.
In addition to examining the factors that shape mortality risk, advisors can also weigh several factors when assessing a client’s longevity risk, from demographic trends (e.g., projecting life expectancy based on the client’s sex and affluence) to health and family history and even to the client’s own tolerance for longevity risk. Advisors can establish a systematic process to adjust and optimize plans for longevity, customizing the plan length for clients beyond choosing arbitrary default age settings in their planning software packages.
Ultimately, the key point is that creating a plan based on how long a client will live is most effective when both mortality and longevity risk factors are considered. Actuarial science offers tools that can help advisors assess these considerations so that they can adjust mortality assumptions and longevity expectations as part of an ongoing process of monitoring and updating a plan. And by making these adjustments collaboratively and regularly, advisors can help clients develop a relevant and realistic strategy to manage their mortality and longevity risks as they journey into retirement!
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