Moving Beyond Life Expectancy Rules of Thumb
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What You Need to Know
Longevity is key to managing retirement savings.
Some clients can expect to live longer than others.
Averages for the general population may be a poor fit for your client.
Advisors and financial professionals develop retirement plans based on their clients’ best interests and circumstances.
There’s a growing awareness that the use of generic retirement planning rules of thumb is no longer consistent with retirement planning best practices.
Moshe Milevsky wrote recently that the continued public interest in the 4% rule, which continues to dominate decumulation discussions, was tiresome. As reported in Think Advisor, Milevsky states, “The (scholarly) world of financial practice has moved on to much more comprehensive and rigorous approaches.”
In our recent HealthView Services white paper on whether the industry should be following another rule of thumb, “planning to age 95″, we showed the vast majority of retirees will simply not live that long. In the paper, we make the case that individualized health-based actuarial longevity should be a starting point for retirement plans.
Using individually customized approaches to withdrawals and longevity is crucial. One data point brings this into stark relief. Retirees who entered retirement with $500,000 or more only spent down around 12% of their portfolios within 20 years, or by the time they passed away.
Other research studies show low numbers of retirees making systematic withdrawals from portfolios or making none at all. Although some retirees are more conservative with their spending with the intention of leaving a legacy, we need to recognize that many retirees are underspending in retirement and have the potential for a better quality of life.
The continued use of industry rules of thumb reflects their attractive simplicity when it comes to retirement planning and communicating how much clients need to save and the income portfolios will generate.
Optimizing portfolios and withdrawals for individual clients through retirement is key to balancing the broad range of variables at play to deliver the best outcomes for clients — whether the freedom to spend more, allocate additional funds for legacy purposes, or address other needs.
But unless advisors use the best available data for the most significant factor determining savings and withdrawals during decumulation — longevity — clients will continue to leave money on the table.
The two main drivers of projected longevity at an individual level are health condition and sex at birth. A male client who has achieved an 80% internal rate of return based on living to age 95 but is then diagnosed with diabetes at 65 has the potential for an additional $700,000 to spend in retirement, leave to heirs, or use for other goals including planning for longevity risk, if he plans around on his actuarial longevity of 79.