How do advisers estimate a client's longevity?

Updated January 10, 2024 

Estimating a client’s longevity can be daunting, but it is central to longevity financial planning. Even the slightest error in calculations can place a client at risk of running out of money during their retirement.  

Determining a client’s longevity is a serious issue. Financial planner at Insight Financial Strategists Chris Chen admitted, “We financial planners are woefully underequipped to figure out how long a client is going to live.” 

“The reality is that most physicians have trouble with that. In fact, even actuaries who may have the best demographic data are unable to decide how any one individual will fit in their predictions for a population,” said Chris.  

In this article, InvestmentNews provides some insight on how advisers can handle this crucial element of financial planning.  

The basics of longevity planning 

What is longevity planning? This is a comprehensive financial planning strategy that is concerned with the years beyond conventional retirement. You could say that this is a concept that’s slowly replacing retirement planning. Longevity planning takes on a more holistic approach that considers the individual, family, and societal perspectives when preparing for retirement.  

Retirement used to mean leaving the workforce and pursuing leisurely activities when people reach age 65. But with all the scientific advancements in health, improved standards of living and other factors, all that has changed. 

Retirement used to last about 15 years. While this remains true in most cases, it’s been observed over the years that many retirees live well past that number.  

With the longer average life expectancy in the U.S., goal-setting in longevity planning is even more necessary. 

The average life expectancy 

In the U.S., the average life expectancy has been steadily increasing year after year. This is expected; there are many contributing factors that allow people to live longer, such as advancements in medical science and public health measures.  

For instance, when the public water supply was chlorinated beginning in 1908, this led to increased life expectancy. This practice killed many types of bacteria, preventing the spread of illness and infection. Water-borne diseases like typhoid, dysentery, and cholera became less frequent, even nonexistent, due to public health measures like this.  

Seemingly trivial measures like these made the average life expectancy in the U.S. increase by more than 30 years in the period between 1900 and 2020. According to research platform Macrotrends, the average life expectancy in the U.S. has increased in the past four years:  

The average retirement age 

In the U.S., the average retirement age has been consistently pegged at 61. Since 2012, the average American has gone from putting off retirement to opting early. This is why there have been some slight fluctuations in the retirement age in recent years. 

According to the latest Gallup Poll, those who are still working in 2022 generally expect to retire by age 66.  

Determining your client’s actuarial age 

The first step in assisting your client in longevity planning is to find out the age they’re most likely to reach. This is known in the insurance industry as an individual’s actuarial life expectancy.  

Perhaps the simplest way to determine a client’s actuarial age is to refer to this table that lists the probable life expectancies of American men and women.  

However, the caveat of simply using this table to base a client’s actuarial age is that it does not account for their health status. Some of the biggest factors that can influence a client’s actuarial age include: 

• whether they smoke 
• family medical history  
• current health status  
• any preexisting conditions  
• whether they lead an active or sedentary lifestyle 
• whether they are on any medication 

Perhaps a more accurate assessment of a client’s actuarial age is to consult an actuary adept with these calculations. Another option is to use a calculator with established actuarial models and statistics. 

Planning for a longer retirement 

Based on the average retirement age and average longevity, most of your clients will have a longer time horizon for their retirement. They’ll surely need a longevity plan.  

Investment house Raymond James offers several important statistics to ponder. For example, did you know that 71% of Americans haven’t saved enough to live through their 70s and 80s? This video shares some interesting facts to think about:  

How to create a longevity plan 

The main parts of a longevity plan account for the different phases or events that can occur in the years that follow retirement. To make an effective longevity plan, do the following after determining your client’s actuarial age:  

Assess current and future needs 

A financial plan like this one involves formulating a retirement strategy, accounting for risk, and having a long-term investment plan and an estate plan. Consider your client’s current income, their expenses and debts. Think about how those can change throughout their retirement years. Here’s what you’ll want to consider as part of the plan for them:  

Create financial security for the future 

Consider what the future holds for your client and their family. What kind of financial cushion will they need to continue living a reasonably decent life? Identify what they want to save for and create an actionable plan for them. 

Assess current income 

Draw a balance sheet detailing all income and income sources. Their exact income will determine the tax bracket they’ll be in and the amount of taxes they’ll have to pay. Remember, any money earned can contribute to any money saved.  

Check debt levels 

Check all the outstanding debt, including student loans, credit cards, car loans, balances on mortgages, and other liabilities. Then figure out ways to pay them off. Ideally, your clients should have zero debt to pay during their retirement. 

Create a spending plan 

Make a list of all the possible expenses. Account for electricity, water, power, internet and cellphone service. Draw up a budget for groceries, medication, and medical treatment. List these expenses in terms of priority; the most important to the least important.  

Assess risk management 

Check and assess insurance coverage. Is there ample disability, life, personal liability, property, and disaster insurance coverage? Make sure this is enough to cover the client and their family in an unexpected event.  

Create an emergency fund 

Financial advisers recommend that clients put up a separate emergency fund. This should be the first step taken when building a financially secure future. The emergency fund should have enough money to cover at least three to six months’ worth of living expenses.  

Save for retirement 

If not retired yet, clients should save for retirement while they still have many productive years ahead of them. But if your client is already retired or close to retirement, have them consider working part time, doing consultancy work, or even putting up a small business and saving what they still can. That’s if they’re still fit and inclined to work.  

Invest for growth 

Even well into retirement, there are investments retirees can get into to generate income and/or add to their retirement savings account. Look into Roth IRAs, traditional IRAs, 401(k) plans, stocks, mutual funds, alternative investments, or maybe even a business. Another good strategy is to have investments in real estate and other income-generating assets. 

Do estate planning 

Have your clients write their Last Will & Testament, power of attorney, and living will. They can put up trusts to ensure that their loved ones are looked after when they die.  

How to stick to your financial plan 

One of the biggest challenges to having clients adhere to their longevity plan is ensuring that they have discipline – and stay true to the plan despite any setbacks. Advisers can suggest these strategies to clients:  

1. Use the automatic savings feature – for your client’s retirement savings accounts, have their financial institutions apply automated savings drafts. That way, they’ll have a portion of their income deposited without hassle and stay on track to meet their long-term financial goals. 

2. Have them write down their goals – putting their goals in writing, short-term and long-term goals, can serve as a constant reminder of what they’re striving to achieve. This will help them stay motivated to push on even if things get difficult.  

3. Always find opportunities to save money – any unexpected windfalls like contest winnings, inheritances from relatives, surprise bonuses – these should be used to bolster savings.   

4. Be patient and stay the course – reining in or erasing debt while saving money for retirement takes a lot of time. Don’t fool yourself into thinking the process is neither quick nor easy.  

A lot of American retirees will live well into their 80s, perhaps 90s, and even with a few into their 100s. By 2050, America could have over 3 million seniors! Here’s a video of an investment house CEO giving tips about longevity planning:  

Key ages in a lifetime retirement plan 

As your client ages, there are key periods in their lives to take note of that can assist them in their retirement plans or strategies.  

If they’re approaching retirement or are already retired, it’s crucial that they are aware of the milestones that can trigger certain conditions or events in their different retirement accounts. They must know at what age they can withdraw or still accumulate money. Here are important ages and corresponding events to remember:  

• At age 50: you can deposit more money into your retirement accounts 
• At age 59½: withdrawals from IRAs and 401(k) plans can now be done tax-free; withdrawing at any age before that means paying a 10% tax on the amount withdrawn 
• From age 62 to 70: you may claim Social Security Benefits. If you begin to take them at age 62, you’ll receive 30% less than you would if you took them at your retirement age. You can receive an 8% yearly increase in your benefit for every year you put off getting benefits after your full retirement age.  This applies to your benefits until you reach age 70. 
• At age 65: apply for Medicare or get another health plan to avoid a penalty.  
• At age 73: start making withdrawals called Required Minimum Distributions (RMDs) from your IRAs and 401(k) plans. This is required by the new SECURE Act 2.0. You have to make RMDs on April 1st of the year you turn 73. But in 2033, the minimum age for taking distributions will be raised to age 75.  

As a financial adviser providing services to senior citizens, the crucial first step is to determine how many years they might live past their retirement age. With more Americans living up to the age of 90 or even 100, it makes sense to prepare a separate longevity plan for that scenario, just in case. 

Savvy advisers will bear in mind that no two clients will have the same financial situations, health condition, envisioned lifestyles, and estate planning preferences. No one can predict what changes in tax laws or inflation will be like down the line for their clients. Health is a consideration, too – declining health could mean needing special long-term care.  

A sound strategy in longevity financial planning is to prepare for best- and worst-case scenarios. Having another plan with considerations for long-term care and long-term income is advisable if your clients live well past their actuarial age. Whichever plan prevails, the adviser should revisit the plan at least once a year to course correct and keep clients on track to reach their retirement goals.  

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