People can conceptualize stock market volatility and the impact on their portfolios, but it’s much harder for them to look at their longevity with the same view.

That’s why it’s incumbent on portfolio managers to educate their clients on the risk they may outlive their assets before they talk about a risk-management strategy, said Moshe Milevsky, associate professor of finance at the Schulich School of Business at York University in Toronto. He spoke Monday at the IMCA Advanced Wealth Management Conference in Chicago.

“The volatility of your longevity is on the same magnitude as the stock market,” he said. “You don’t see the longevity because you don’t get a NAV (net-asset value) statement at the end of the year. You need a risk management strategy for both.”

The average standard deviation on the stock market’s average performance during any decade since 1940 is 55 percent, he said, In research he conducted looking at obituaries and applying the average retirement age of 65, the average longevity after retirement is about 19 years, However, average standard deviation of how long a person will live after retiring at 65 is the same as stock market: about 55 percent.

It’s important to have discussions on how long clients believe they will live, but to change how the conversation goes, he said, citing a Duke University study that showed how a mortality question is asked changes the person’s view on longevity.

When people are asked whether they will survive to age 85, 55 percent say yes. However, if the question is whether a person will probably die by 85, 70 percent will say yes. 

“The words really matter when having conversations,” he said.

Also, planning and budgeting for an uncertain horizon isn’t easy, as most people have problems with probability. The worst thing that can happen for a retiree is that they will outlive their nest egg, and the chances of that are 25 percent, he said. That makes it important for portfolio managers to focus on what they can do to increase the longevity of the client’s money.

Milevsky said portfolio managers should consider the role of using annuities as part of a clients’ total retirement wealth and protecting against longevity. Despite the concerns about low interest rates, as a client gets older, the mortality credits become the majority of the return of the portfolio, especially as the person lives to 75, 80 or 90 years old, he said. This is especially important given that defined benefit plans for new employees are rare.

“We’ll never get past longevity risk,” he said, which is why annuities can help to guard against this.