There is No Perfect Plan
If we knew how long you were going to live, it might be possible to build the perfect plan. While predicting mortality is still much more a guessing game than an exact science, recent advances in genetic testing are making it possible to identify “exceptional longevity” in humans.
Yet for all the optimism being generated by our collective longevity, the fact remains that living longer does not always mean living without physical and mental infirmities. Not everyone views longevity with hope and positivity. Rightly so, many people are confused about how long they might live and what that means to the quality of their lives. According to the Society of Actuaries, Americans often underestimate their life expectancy, sometimes by five years or more. In any case, opinions on what living longer really means are mixed.
The Genetics Game
Last summer researchers at the Boston University Schools of Public Health and Medicine and the Boston Medical College working with a pool of more than 1,000 men and women aged 100 and up identified 150 genetic markers they said could predict “exceptional longevity” — defined as a lifespan lasting into the late 90s and beyond — with an accuracy of 77 percent.
Should advisors attempt to predict their client’s mortality when building financial plans? Probably not, yet some are doing just that. Even utilizing life expectancy tables is a flip of the coin. Statistically, there is a 50% chance that for a couple aged 65 today at least one will live into their nineties. That is why is a more prudent plan accounts for a life expectancy of between age 92 and 95. This provides a cushion at the back end that can be left as a legacy for heirs, or be used to cover unexpected medical expenses or other surprises earlier in retirement. We generally subscribe to this method and it is a cornerstone of our contingency planning that “bets” on your longevity.
Backlash
Susan Jacoby is a leading voice who is tempering the euphoria surrounding longevity which has become so prevalent. Her new book, Never Say Die: The Myth and Marketing of the New Old Age, delivers a sobering view of the dichotomy between how people are thinking about aging and how people are really aging. Yes, people are living longer, but what is the quality of their lives?
While the bar has been reset for what can be achieved by the “young old” in their sixties and seventies, Jacoby states that for the “old old” in their eighties and nineties the difficulties of maintaining a purposeful and pleasurable everyday existence almost always increase — sometimes incrementally and sometimes, if catastrophic illness strikes, exponentially — with age.
While there is no shortage of chatter about ninety being the new sixty, the focus should probably be about making ninety a better ninety. Regardless of how you feel about longevity, planning for old age becomes the real question. How much do you really want to think about it?
The Phases of Retirement
We adhere to the basic notion that a typical retiree could now live 30 years or more in retirement. In terms of planning (and specifically when building an income plan) we make some assumptions that this period will generally cover age 65 to 95, however this will clearly be different for certain individuals. Another assumption is that a retiree generally goes through lifestyle changes every ten years or so, which will affect their income needs, sometimes dramatically.
The first or “active” phase of retirement is assumed to begin when the individual retires. This phase is characterized not only by a notable increase in leisure-related expenses, but also by a likely decrease in taxes and a moderate decrease in basic living expenses. A significant change in basic living expenses may also occur when the residential mortgage is paid off.
Phase two, or the “stable” phase, can be thought of as a transitional phase with reductions in leisure expenses and further increases in healthcare expenses. The third or “secure” phase is marked by a sharp increase in healthcare expenses, negligible leisure expenses, and possibly small changes in basic living expenses.
Readjusting to Reality
Returning to the question of how much planning is actually going on out there, the answers may not be so surprising. The 2009 FINRA Financial Capability Study found that the majority of Americans do not plan for predictable life events, with only 42 percent reporting that they have ever tried to even figure out how much they need to save for retirement. And of that minority, most of this planning focuses on the first phase of retirement, rather than the later phases and the realities of dealing with limitations.
When retirees enter the later phases of retirement, they are less likely to be able to work and more likely to need help. Yet a significant number of Americans are not planning directly for the later phases. Furthermore, other research points out that many individuals avoid planning for the risks they may face in the long term for a variety of reasons, including having to contemplate potentially unpleasant events.
The last phase of your life can be all that you want it to be, but you need a vision and you need a plan, and you need to be realistic. Then you need to have the discipline to stick with it.
Contact Us:
1650 Borel Place, Suite 227
San Mateo, CA 94402
T-650.573.9960
F-650.573.9930
info@hatchplan.com
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