Much of the world’s employment is based on predicting the future.
Economists, tarot card readers, seismologists and meteorologists are prediction experts, but advisers fit into that group nicely.
It is a wonder there are so many prediction experts, given that most fail at their job. Even with technology and great data, we still can’t predict an earthquake or how much rain will fall in California over the next month.
Are financial plans any better? They are based on many assumptions such as future income, earnings on portfolios, tax policies and client goals.
With so many factors based on educated guesses, advisers come up with the best plan possible and know the plan must be reviewed regularly to update all the assumptions.
EVERYONE'S A CENTARIAN?
One assumption that advisers use causes me more angst than the rest: longevity projections.
I speak to thousands of advisers around the country yearly. In my session on health care expenses, I query the audience on what numbers they use for longevity.
The most common answers I get? Age 100 or regular life expectancy tables.
“Why?” I ask.
The room is silent, as few have an answer.
I once attended a session at a large conference, and the confident speaker told the audience that planners should use age 100 in planning for everyone. Four-point restraints wouldn’t have kept me in my seat.
I immediately stood up and asked, “What if your client is a 45-year-old, 300-pound diabetic smoker?”
He had the audacity to say, “Yes, because medical advances are happening quickly.”
Come on! Although our country has experienced years of improving life expectancy, obesity, decreased physical activity and a host of other unhealthy behaviors are causing us to lose ground.
We have to guess at enough in a financial plan, so wouldn’t it be better to use a life expectancy number that better reflects a client’s actual health?
As a CFP who worked previously as an M.D., I believe strongly that advisers should learn to comfortably ask about health issues when gathering data for a financial plan.
The best question to get the conversation started? “Tell me what you do to take care of your health.”
Responses have run from a 10-minute explanation of how a client got religion on better health and lost 50 pounds over the past couple of years to one client who sheepishly admitted, “I do 12-ounce curls.”
ASKING ABOUT HEALTH
If clients ask advisers why they want to know about their health, advisers should stress that the information is important for a smart financial plan.
In that initial conversation, there are only three other important factors.
One factor is weight because a significant risk factor for diabetes and heart disease is truncal obesity. The other two, which have to be asked about because they aren’t readily apparent, are whether a client smokes and whether there are any major health issues.
I then break life expectancy into three categories:
· If a person is proactive about taking care of his or her health, doesn’t have any major illnesses, doesn’t smoke and isn’t overweight, I use 100 for the longevity number.
· If a person doesn’t do anything to take care of his or health but doesn’t have any major illnesses, doesn’t smoke and isn’t overweight, I use average life expectancy.
· If a person has a major illness, does smoke or is overweight, I start the financial plan with seeing where they come out in relation to their goals. If they have plenty of money and are doing a good job at saving, I plan for average life expectancy and don’t worry about it. However, if they don’t have enough, I suggest they go to livingto100.com, take the life expectancy quiz and tell me the number. When asking them to take the quiz, I don’t tell them that they don’t have enough money. I say given their health issues, it would be useful to have a more refined life expectancy number.
My goal in this exercise is to get clients to be more realistic about their longevity and health. I don’t want to stress clients with significant risk factors and a life expectancy of 80 out by telling them that they have to save a heck of a lot more for their money to last to age 100.
This technique also worked in the reverse for me.
I once had a client who was 64 and getting ready to retire. He and his wife had about $2.5 million saved and Social Security benefits to look forward to, and they wanted to live on about $150,000 per year.
The numbers worked out well. However, the client already had had a minor stroke and heart attack and was insistent that he would live only to 72.
His wife was very healthy, so I used 100 for her life expectancy.
Simple, right? No.
Since he was convinced he was going to die relatively young, he wanted to take a lot of expensive trips and give his three children a total of $1 million right then and there. That would have blown up the plan and left his wife without enough money.
He took the livingto100.com life expectancy calculator, and his life expectancy was actually age 84.
Because of this, I was able to persuade him to take some very nice trips but to hold off on giving his children any money. He agreed.
He is now 73 and still doing well. He and his wife have enjoyed vacations and still have plenty of money.
Financial planning is a beautiful profession, and though we are refined soothsayers, our bigger value is keeping clients focused on their goals and helping them adjust when the assumptions change. We can help our clients live full and joyous lives now by using the best information available and regularly revisiting their plans.
This will ideally help clients privileged with longevity reach their full life expectancy potential happily.
This story is part of a 30-day series on preparing for retirement. This story was originally published on April 4.