In wealth management, a common rule of thumb is to plan for a client's finances up to age 95. But a new study suggests a different approach: Get real with clients about their life expectancies.
In reality, very few Americans live into their mid-90s. The average life expectancy for men in the U.S. is about 75, and for women it's 80, according to the
So does the "plan to 95" rule make sense? Not to HealthView Services, a software company that projects health care costs. In
"When you look at the reality and you look at the probability of hitting that number [95], it's time to step back," said Ron Mastrogiovanni, president of HealthView Services. "It definitely makes sense to let someone know what their actuarial number is, and then start from there."
Actuarial data on life expectancies is available from
HealthView's research underscores this. Without any chronic health conditions, the study said, a 65-year-old man has a 19.3% chance of living to age 95 or beyond. If the same man has high cholesterol, it's 12.5%. If he's obese, it's 2%. And if he has diabetes, it's 0.4%.
In terms of life expectancies, a 65-year-old woman with no conditions could expect to live to age 90. If she has high cholesterol, her life expectancy drops to 87. If she's obese, it drops to 85. And if she has diabetes, it goes all the way down to 82.
This is the kind of thing wealth managers should discuss with their clients, Mastrogiovanni said, so they can adjust their retirement savings accordingly. But he emphasized that this would only be the beginning of the discussion — the client may then nudge their target lifespan up or down, depending on how carefully they want to guard against longevity risk.
Either way, Mastrogiovanni said, it's better than just going with 95.
"At least they're making a decision based upon factual data, and not a number that's just pulled out of the sky," he said.
Financial advisors who set their planning age at 95 — or even 100 — argue that it's better to save too much than too little; no client wants to live a longer life than expected and find that their nest egg comes up short.
"In my experience, most would rather have a little left over than run out early," said Brandon Gibson, founder of
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But there's also a cost to overestimating one's lifespan. To calculate this, HealthView imagined a 65-year-old man with no health conditions and a pre-retirement income of $100,000. This man saves as if he will live to 95, but then he's diagnosed with diabetes and his life expectancy drops to 79.
If this man continues living as if he'll make it to 95, but instead dies at 79, he'll miss out on an additional $727,947 he could have afforded to spend. Instead of potentially improving this man's life in his golden years, the money sits in a bank account or a 401(k).
"In retirement, they're reducing their standard of living in order to have money throughout their lifespan," Mastrogiovanni said.
How can wealth managers help clients avoid this fate? The key, HealthView argues, is to use actuarial estimates specific to each client, and then update them regularly as their age and health conditions change.
The tricky part, of course, is telling a client they're not likely to live into their 90s.
"Addressing a client's life expectancy can be sensitive," said Josh Nelson, CEO of
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To keep the conversation from getting emotional, some advisors prefer to focus on numbers and computer models.
"As a starting point, I use our planning software's actuarial table," said Kevin McLoughlin, co-founder of
And according to Mastrogiovanni, the client may react more positively than one might expect.
"They feel relieved that it's being addressed," he said. "The client, if they have multiple conditions, they know they're not living to 100. … People prefer the real numbers."
