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 95th 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.