Mary Beth Franklin: Clients short on understanding of longevity risk

Despite increasing life expectancy in the U.S., more than half of retirees and pre-retirees underestimate how long they may live, according to a new survey from the Society of Actuaries (SOA). A separate report released by the Insured Retirement Institute (IRI) on Tuesday noted that women are particularly at risk for outliving their savings. The implications for adequate retirement planning — and financial advisers — are enormous. “There is a general misunderstanding of what 'average life expectancy' means,” said Cindy Levering, an actuary and retirement expert. “When people are told they will live to an age such as 80 or 85, they don't realize that this means there is a 50 percent chance that they could live past that age.” Commenting on the results of the SOA's telephone survey of 1,600 adults between the ages of 45 and 80, Levering noted that “underestimation of life expectancy, combined with having too short of a planning horizon, can result in inadequate funds for retirement needs.” In the past 50 years, life expectancy for newborn American men improved by an average of almost two years each decade, from 66.6 years in 1960 to 75.7 years by 2010. For women, the average increase was about 1.5 years per decade, from 73.1 years in 1960 to 80.8 years by 2010. Men have a 40 percent chance--and women have more than a 50 percent chance--of living to age 85, assuming they reach age 65 and are in average health. “Underestimation of life expectancy increases the chances that retirees and pre-retirees will exhaust all resources other than Social Security,” Levering said. “While purchasing life annuities is not an absolute guarantee, it is one strategy to reduce the risk of outliving financial resources.”

Women at greater risk

A separate study released by the IRI on Tuesday showed that women face unique retirement income challenges due to their longer life expectancies, lower lifetime incomes and higher health care costs in retirement, including long-term care expenses. Many women also leave the workforce, at least temporarily, to care for children or elderly family members, reducing their opportunity to save for retirement. In 2011, the average defined contribution account balance for a woman was just $59,104 compared with $94,063 for a man, according to Vanguard's annual report How America Saves 2012 . Outliving their assets is one of the top three concerns for women in retirement, along with market volatility and health care costs, according to recent IRI research. When asked what is the one most important trait of a retirement investment product, 18% of women in the telephone survey of recent retirees conducted in March 2012 said monthly guaranteed income and 17% said one recommended by their financial adviser. Yet more than half of the women in the IRI survey said they have not consulted a financial adviser. It seems like an enormous opportunity for advisers to educate current and prospective female clients on retirement income strategies and solutions (Join me for our second Investment News webinar on Women and Investing on Tuesday August 14, 2012, at 4 p.m. ET as my three guest experts — Cathy Curtis of Curtis Financial Planning, Heather Ettinger of Fairport Asset Management and Jeff Stoffer of Stoffer Wealth Advisors — share their proven strategies for attracting and retaining female clients.