An often-cited fear among those planning for retirement is “running out of money before they die and being a burden on family and others.” A response that attempts to inject a bit of humor into a nettlesome situation might be, “You tell me when you will die, and we’ll work up a super plan!”
A 2017 study by InvestmentNews Research and Nationwide Insurance Company discussed “the core of the planning gap,” expectations versus reality. The median age of investors surveyed was age 54. Of the group 65% were male, 35% female. Researchers targeted those already saving for retirement so as to focus on those clearly thinking about issues of longevity and financial preparedness.
Twenty-seven percent had investable assets over $1 million; 45% had annual household incomes exceeding $150,000. Twelve percent were retired, 74% were working full time; 7% were self-employed; 5% working part time. Fifty-five percent were confident they were saving enough; 46% thought their standard of living was likely to decline.
Where’s the planning gap? Longevity assumptions. Investors assumed an expected length of retirement of 22 years. For the 43% of respondents using a financial adviser, advisers assumed an expected length of retirement of 30 years. Advisers plan for a retirement that will last 8 years longer than the typical investor foresees. “The gap” is the difference between what advisers calculate and what many believe as to how long their money will have to last. Why is that?
Advisors who are Registered Investment Advisors, and those who are Certified Financial Planners (CFPs), are held to high standards, that of a fiduciary who must act in your best interest. The SEC recently affirmed that idea. Every business that expects to earn your business and retain your trust must act in your best interest. That’s basic business sense. The challenge is that often determining what was in your best interest is a function of outcomes. Lawyers love that!
Many advisors use software programs to help estimate the odds of you (and your loved one) not running out of money before you die, i.e., the likelihood of success in meeting financial goals. Numbers and assumptions are plugged in—how long you and/or spouse might live, sources of retirement cash flow, estimated expenses, returns on your financial nest egg, inflation rates, etc.
Note the words “assumptions” and “estimated.” When calculating the odds of anything, an advisor should stay on the conservative side of what essentially is pure guesswork. That’s one reason why a 30-year longevity is used versus a shorter period. If you have a document written in 2019 predicting a high degree of success based on current assumptions, and for whatever reason before 2049 you’re out of money, you or your kids may sue the planning firm because they created a false sense of confidence!
Advisors cannot make predications. All manner of disclosures and disclaimers go into planning documents to explain the assumptions used. Assumed investment returns are based on long term past results. They tell you nothing about future performance, sequence of returns, or timing of the next bear market. Life expectancy averages are just that—averages. Some will die sooner, some later. The American Academy of Actuaries says odds are 31%, almost one in three, that one member of a 65-year old couple will live to 95; odds are one in ten one could live to 100!
Of the surveyed group, only a third were female. Women know that since roughly 80% of men leave the planet before their wives, the odds of being a widow are strong. They, more than men, worry about being “economic bag ladies” and a potential burden on their children. Such worries are not purely a function of net worth, just part of being a caring female wanting to preserve financial independence.
As noted, the median age of investors surveyed was 54. Whether you are 44, 54, 64, 74, or 84, you have ample time to work on fiscal, physical, and mental fitness. The goal should be to not worry about when you will die, but to focus on preparing for and living a long, fruitful, and purposeful life. The future always arrives on time. What it will bring in reality is fanciful supposition. The goal is to be financially, physically, and mentally fit to handle whatever God and man throws at you. “Readiness” is the one thing you can control!
By Lewis J. Walker, CFP®