In the final part of a three-part series, about what planners do and do not know, we explore the most important variable in financial planning; longevity. As I discussed, in one of my first ever blog posts; the most important variable when creating a financial plan is the hypothetical length of the plan. In other words, how long are we all going to be around. If we knew how long we were going to live, financial planning would be easy. We would have an endpoint and working backwards to determine a saving strategy would be easy.
Alas, we don’t know how long we will be on Earth. And since we don’t know how long, or how short we will be around, we need to allow a lot of flexibility in how much we are willing to save before retirement, how much we need to spend in retirement, and how to balance saving for the future with living for the day.
In this month’s ‘For your Consideration’ we consider the idea that longevity projections for retirement planning may be completely wrong. Science may be the biggest burden to financial planning’s most important variable.
What if we are on the cusp of longevity risk becoming a thing of the past, or worse yet, an infinite risk?
Over the past few decades the sciences have gone from a steady marathon trot to an all-out sprint, with no signs of stopping. Technological advances have made life easier and more enjoyable. Biotechnology has helped in increasing the time we get to enjoy life. There is already an assumption that the first person to live to 150 has already been born.
I see two problems with these advances, and I will first introduce the worse case scenario: Financial planners are usually very conservative in their predictions. The variable we are most careful predicting is age of passing. Regardless of family history, and the client’s predictions, we always assume a long, long, long life is ahead for everyone. And the goal is to do everything possible to create a plan that our money will last longer. As we currently see it, our current predictions of longevity are a fair assessment, but with technology advancing so quickly what if ‘the next big thing is around the corner’? A cure of cancer, dementia and other major health issues could be discovered tomorrow. Wonderful news indeed, but just like that, longevity estimates may instantly go up 20% or more.
A solution may already be baked into our plan. The money we set aside for health care costs may instead pay for those few extra years of leisure, if health care costs do decrease due to technological advances. But there are discussions among professionals that we should already add 20% more years of longevity into our calculations, ‘just in case’. For millennials and beyond I am already using 120 to 125 as the average age of passing. The more interesting ‘problem’; what if technological and biotechnical advances make working easier and more enjoyable? The socially accepted age of retirement is mid to late 60s. With the hypothetical advances in technology mid-60s may suddenly become ‘middle age’.
What are the reasons people want to retire? Stress on the job? Wear and tear on the body? Not feeling fulfilled? Increased longevity and healthcare advances may make all those problems go away. What if within the next decade a socially accepted age of retirement becomes mid-seventies, or mid-eighties? Suddenly, our savings period becomes much longer and stronger. Is it possible that younger clients are over saving for certain goals? (Editors Note: Over saving is never ever, ever, ever, ever a problem! This is purely hypothetical!).
Plan for the worst, hope for the best
Please understand that these past three posts are purposely apocalyptic in tone, to get a point across. Using extreme examples, it’s important to note that everyone’s future is always uncertain. The only guarantee I will make is that all predictions could be wrong. Including that last one.
The only constant is change, so while we should make a plan based on what we know, we must also consider what we don’t know… yet.