Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
We aspire to live a long life. Indeed, a recent study out of Norway found that, on average Norwegians wish to live until age 91.
A Pew research Center study found that 68% of respondents indicated they would accept medical treatments that slow the ageing process and make it possible to live at least to 120.
An AIG survey found that 53% want to live to 100 – yet 51% were uncertain their savings will last. And, nearly six in 10 (59%) feared running out of money more than death.
A constellation of financial risks face retirees. Since the beginning of 2022, I’ve written a number of articles that explain why it is crucial for retirees, especially constrained investors, to be protected against risks that will reduce or even wipe out their retirement incomes. But because the consequences of leaving longevity unmanaged are likely to be the most devastating, advisors must act now to address it.
I don’t like to be critical of financial advisors, virtually all of whom I’ve know over my career I have found to be among the most caring and honorable people I’ve encountered. But there is a pervasive “blind spot” that afflicts a large segment of the advisor population that precludes them from ensuring their clients against longevity risk. This longevity blind spot is a cancer that, if not expunged, will consume their clients’ good will. Proactively addressing longevity risk is tantamount to buying a call option on future success.
Some advisors believe that they can design investment portfolios with planned withdrawals for income that match their client’s indeterminate longevity.
You are fooling yourself.
There are too many unknown outcomes that threaten the continuity of that income plan for advisors to have justifiable confidence in such a strategy. Think about it. An uncertain, high-stakes risk like longevity can only be properly addressed with a certain solution. There is an indeterminate risk that your house will be destroyed by fire. Your solution to that challenge is the certainty of fire insurance.
Of course, this conjures up what some will view as the dreaded “A-word”: annuity. If that’s you, stop thinking and behaving irrationally. Rational (cost-based/liquidity-based) objections to annuities no longer exist. Annuities have been made to comport perfectly with the RIA’s worldview and business model. What continues to exist is the very real prospect of losing clients’ good will from continuing to ignore longevity risk – and, perhaps, legal costs as well. This is a likely consequence that some advisors will confront.
Consider an RIA, whom I’ll call Sarah, and her 66-year-old client, Jessica. Jessica is in good health. Jessica knows something about living a long time in retirement. Her mom, Alice, lived to age 96. Could Jessica outlive her mom by, say, six years? Of course, she could. A recent New York Times article listed some of the potential breakthrough treatments and technologies that hold the promise to substantially increase life expectancy. These innovations include:
- Life-extending supplements
- Gene sequencing of supercentenarians
- CRISPR-based cures
- Deep brain stimulation (to reduce obesity)
- Designer genes
- New treatments for Alzheimer’s
- Drug cocktails that stop he epigenetic clock
- Lab-grown organs
- Automation that avoids auto accidents
- Robot surgeons
- Nanobots, and
- Cellular reprogramming
If Sarah outlives her mom by six years, she will need income until age 102. That means needing income for 432 months, or three and a half decades.
Sound farfetched? It’s not. Today, there are nearly one million centenarians in the U.S. Their ranks are projected to reach five million over the next 30 years. By then, living to 100 may be commonplace.
The questions advisors should be asking clients are, “What is old?” and “Is living a long life a risk?”
The answers you receive may surprise you. Clients may indicate that they have family members or friends who have lived to age 90 or beyond. And many may envision their own lives enduring that long or longer. BlackRock recent found that, “63% of women are worried about outliving their assets.” Take this to heart. The longevity of income is a primary concern among Boomer women – those who are about to control all the money.
It is no longer tenable for advisors to ignore the one certain way to neutralize “the emperor of all risks.” Embrace the “A-word.”
On July 18 at 1:00pm ET, Kerry Pechter and I will be answering advisors’ questions about income planning and annuities as part of Advisor Perspectives’ “Ask the Expert” series. And on August 16, I will be moderator of a webcast sponsored by RetireOne. This presents an opportunity for you to learn about RetireOne’s fiduciary insurance solutions.
Wealth2k® founder David Macchia is an entrepreneur, author, IP inventor and public speaker whose work involves improving the processes used in retirement income planning. David is the developer of the widely used The Income for Life Model®, and the recently introduced Women And Income®. David has authored many articles on the subjects of retirement income planning and financial communications. He is the author of two books, Constrained Investor®, and Lucky Retiree: How to Create and Keep Your Retirement Income with The Income for Life Model®
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
