How Can Financial Advisors Estimate Their Client's Life Expectancy
The task of estimating life expectancy: It could the most difficult task that a financial advisor has to perform, not only because the task is impossible to perform accurately but also because it’s such an awkward topic to bring up.
Nobody wants to think about the prospect of their own death, let alone have a professional in a suit estimate when that is likely to happen to them.
Yet, it’s a crucial task that advisors have to perform with some degree of accuracy, otherwise there’s a serious risk that their client’s money could run out in retirement. The other side of the coin, where the client was given an estimate that was too cautious and so they didn’t have enough to money to enjoy the latter years of their life, is arguably just as bad.
So, how do financial advisors go about their task and what software is there to help them?
Software for Predicting Life Expectancy
The Social Security Administration publishes actuarial tables estimating your life expectancy, as well as life expectancy calculator that allows people to jot down their date of birth and their gender to get an idea of when they’ll pass away. These facilities don’t take into account factors such as their health history or that of previous generations, which has been proven to have a huge effect on life expectancy. As such, it should only be taken as a rough guide.
Another useful tool is livingto100.com. This asks people 40 basic questions about their health and family history, providing an estimated life expectancy based on this. Factors such as the age gap between spouses should also be considered.
How to Predict Life Expectancy
Most experienced financial advisers will give clients multiple strategies based on several ‘what if’ strategies, then allow them to choose the one that they feel most comfortable with. This is an approach, which prevents them from having to tell clients how long they have to live. The ‘what if’ scenarios could potentially be categorized as ‘optimistic’ ‘average’ and ‘pessimistic’.
The truth is that there is no accurate way to predict someone’s life expectancy. The only way an IFA could guarantee their client won’t run out of money is by telling them to keep working until they drop dead. Perhaps rather than saving to retire as soon as possible, we should aim to work for as long as possible in jobs we adore...Indeed, one of the disadvantages of having a long life expectancy is that we may have to work longer in order to produce the income to life comfortably in retirement. Retirement products such as annuities can come with much worse rates if you’re determined to have a long-term life expectancy. IFAs have joked in the past that the best strategy to get a good annuity rate is to take up smoking...
Whatever strategy that a client chooses to go with when it comes to estimating their own life expectancy, it’s so important for IFAs to outline the potential cost of running out of money in retirement and ensure their client have an alternative strategy in place to prevent that from happening.