Good financial planning isn’t about forecasts or projections. It’s about managing one’s finances amid uncertainty.

Sure, we go through times where we can feel more certain or less certain, but the normal state of affairs is that the future is uncertain regarding some aspect of our finances and our lives. It has always been that way, and I believe it reasonable to assume it always will be.

I’m guessing that any financial planner with more than a few years of experience has had a retired client say something like “I can’t afford to lose money because I don’t have time to recover.” Given the behavior of the markets, you may have heard it recently.

It is a statement that warrants some exploration. At the very least, “I don’t have time” conveys some anxiety. That anxiety is usually driven most by market behavior, but it sometimes stems from, or is exacerbated by, a mortality issue.

I do not lose sleep over whether markets will recover. Our clients are properly and well diversified given their goals, and as long as they stick with their plans, the odds of getting a good result are quite high. 

I have had a restless night or two over the years worrying about whether a particular client would in fact stick with their plan.

There is always someone screaming “This time is different” and suggesting an abandonment of the tenets of prudent investing, and the lower the market goes, the louder and more pervasive the screaming seems to be.

Will they take their well thought out life goals and toss them aside just so they feel more confident they won’t see a lower number on an upcoming account statement? Will they shrink their time frame that dramatically?

We know that such a dramatic shift is usually damaging but it does beg the question, how much time does a client really have? How much time do any of us have?

The answer is unknowable, of course. The proverbial bus may be just around the next corner for all we know. Some clients are confident that their time frame is short due to illness. For most clients, we can only make educated choices regarding life spans.

The easiest starting point to make an estimation is a mortality table. Back in 1980, the Social Security Administration estimated that the average 65 year-old male in the United States would live another 14 years. Today, they say a 65 year-old man is expected to live 18 years to age 83. 

These are just averages. On average, do you plan to the average? I doubt it and hope not. Few clients will be average.

The practical issue is whether to plan for an above or below average life expectancy for a particular client.

Personal habits definitely impact life expectancy. Bad diets, obesity, poor general fitness levels, hazardous work or hobbies, stress, family history and chronic diseases among other factors should be considered, of course. However, I think we all know of exceptions. 

A couple of years before she passed away at 94, I asked one of my clients why she thought she was in such good health. Her reply: “Since I was 16, I eat bacon every morning and drink some whiskey every evening.” She was dead serious.

Nonetheless, barring a terminal diagnosis, most planners are loath to assume a dramatically short life span. Even at 92, I would not have bet my client would only have two years left with us.

Just about every withdrawal rate and portfolio sustainability study I read looks at a minimum of 30 years. This is not surprising given that most tables say that for couples both currently age 65, in roughly 20 percent of the cases at least one of them will live to attend their 95^th birthday party.

Further, the trend for the last century has been toward longer life spans.

We don’t know much, but we know more than ever about our bodies, how to care for ourselves, prevent problems, treat ailments and improve personal safety. I had the privilege of helping lead a delegation of financial planners to Russia several years ago, and our Russian cohorts over there thought we were crazy to plan for clients to live into their 90s. The average life expectancy of a newborn male over there was less than 60, they told us, due in large part to a vodka-laden diet and simple safety issues like the lack of seat belts and airbags.

We also know that on average, wealth correlates with longer life. In general, the more means at a person’s disposal, the more likely they are to be better educated about how to take care of themselves, better able to do what needs to be done and have access to good care when its needed.

Given that clients of financial planners are generally of above average means, it is reasonable to wonder if our 65 year-old couple should be thinking their odds are better than 20 percent. 

For some insight on that, I take note of the tables annuity companies use in pricing their products. Insurance companies must assume that that their contract purchasers are confident that they will live an extended life and adjust for this adverse selection.

The 2012 Society of Actuaries annuity tables tag the probability of at least one of the member of a couple both age 65 living another 30 years at 43 percent. 

Clearly, insurance companies are in a different position than the typical family, so their table may not be perfectly applicable, but it does suggest making a more conservative than average life expectancy assumption and that 30-year assumption is within reason.

Sort of.

There is a price to pay for being too conservative. For retirees, that price is a retirement that may fall far short of its potential.

Take the classic 4 percent rule scenario. If you assume a firm 30-year time frame, to be “safe” from running out of money, you tell your clients they should only start off spending 4 percent of their nest egg. The result: most—possibly all—of your clients will pass away having spent their last years doing far less than they could have.

Most (4 out of 5?) will not live long enough to have needed the money to last that long. Of those that do survive, for them to be insolvent, they would have to experience a market that behaved worse than any other period in history and make no changes to their spending from the pattern with which they started their retirement. 

A few years ago, Bill Bengen, the originator of the safe withdrawal research that led to what is now known as the 4 percent rule (he never called it that), gave an interview to Forbes in which he pointed out that even with a 4.5 percent initial withdrawal rate, 96 percent of the time, after 30 years, the original starting value was intact. This inspired my friends Dr. Wade Pfau and Michael Kitces to have a conversation. Dr. Pfau crunched some numbers, which were shared on his blog, Retirement Researcher and on Kitces’ Nerd’s Eye View.

The median nominal value after 30 years of spending (real) of 4.5 percent was 4.6 times the starting value. Almost 70 percent of the results showed a terminal value with the purchasing power of the starting value, or more.

One way to look at this is that the more conservative you are in your assumptions in an effort to reduce the odds a client will need to adapt, the greater the odds they will be giving their heirs the ability to do more financially because the client did less. 

That may be the approach they wish to take, but they should choose it based on good information not statistics that make something good—a long life—sound like something bad.  
Instead of trying to prevent the client from needing to adapt, perhaps it would be informative to assess the types of adaptations they are capable of making and helping them shore up their adaptability. It is not a “10 percent chance you will run out of money at age 95”. It’s a “10 percent chance you will need to make an adjustment between now and age 95, so let’s explore what those adjustments might be and when we would make them.”

Financial planning is an ongoing process, not a one-time set and forget it event. Financial planning should help people use their money to make the most of their life, not use their life to make money.  

Dan Moisand, CFP, has been featured as one of America’s top independent financial advisors by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager and Worth magazines. He practices in Melbourne, Fla. You can reach him at [email protected].