How long do you expect to live? It's a touchy question, but research shows asking it can significantly help investors prepare for retirement.
Death is rarely a pleasant topic of conversation, but it's a key factor in retirement planning since the longer you live, the more savings you'll need to finance your life. But because it's uncomfortable, many savers avoid realistically estimating their own lifespans — which can lead to poor planning.
"People tend to underestimate how long they will live in retirement, which means they tend to save too little, spend too much and run out of money in later life," said Olivia Mitchell, executive director of the
The good news is that, according to new research, even the most cursory conversation on the subject can make a big difference. Mitchell recently co-authored a
But the study wasn't interested in how well the respondents guided Mr. Smith. Instead, it focused on how accurately they estimated their own life expectancies after answering the questions. The researchers measured the gap between people's subjective and actual life expectancies — in other words, how long they thought they would live versus how long they would probably live in reality, based on their gender, age and other demographics. In general, the average gap was 17.1%. But after reading the Mr. Smith paragraph, that gap shrank by 5.2 percentage points.
"In other words, simply prompting people to think about a financial decision related to longevity risk affected peoples' estimates of their own anticipated lifespans," the study said.
For financial advisors, what this means is that even just broaching the subject of a client's lifespan can substantially help them think more clearly about the future. In some cases, that can mean better preparing for longevity risk — the danger that a person will outlive their retirement savings.
"When financial advisors are doing their jobs well, they will help people understand not only the too-simple concept of life expectancy, but also the notion that half the people live longer than this mean," Mitchell said. "Therefore, plans are needed to cover the eventuality of living to 100 or beyond, which is what longevity risk refers to."
Of course, this is easier said than done. How does one remind a client of their own mortality and then have a calm, unemotional conversation about finances? Advisors have a wide range of methods. When possible, some said, it helps to make it funny.
"I find it's best to be compassionate, direct, and (for the right clients) inject a little humor," said Louis Leyes, a financial planner and partner at
Lora Hoff, a CFP at
"I say something like, 'My plan will need to include some assumptions about how long you will live,'" Hoff said. "'I can use the actuarial default, or I typically use age 100, unless you have some specific preference of what you want to see — I don't like to kill anybody off in my planning!' Then I just laugh about it."
Others use technology, including software like
"We use MoneyGuidePro's questions about whether they smoke, how healthy they are and the longevity in their family and let the program decide on their lifespan," said Lisa Kirchenbauer, a CFP and founder of
Some advisors say that by treating death as a purely practical matter, they can keep the conversation from getting uncomfortable.
"I actually don't find it difficult to talk to clients about mortality," said Anna Sergunina, a CFP and president of
Leibel Sternbach, a financial advisor and the chief technology officer of
"Our job is to ask the hard questions," he said. "They know and expect it of us."
