WEALTH OF INSIGHT
OLD MUTUAL WEALTH INTELLIGENCE
A FRESH LOOK AT
longevity
By Jonathan Brummer, Advice Development, Old Mutual Wealth
To get an idea of how long people live in general, we could then arrange
You have probably read a few headlines on how people are living longer
than they used to. Although it makes for interesting conversation around the
dinner table, it may not really be of that much use when it comes to your
clients. Let me explain.
these from youngest to oldest, like this:
First, let’s take a look at how these longevity numbers are determined. Imagine
taking a sample of ten people and noting the age at which they died. An
example could be as follows:
Name
Age at death
Fred
31
Holly
72
Joe
42
Maria
29
Mike
98
Sam
56
Solly
81
Susan
15
Thabo
57
Winnie
68
Old Mutual Wealth is brought to you through several authorised Financial Services Providers
in the Old Mutual Group who make up the elite service offering.
Name
Age at death
Susan
15
Maria
29
Fred
31
Joe
42
Sam
56
Thabo
57
Winnie
68
Holly
72
Solly
81
Mike
98
Based on this particular sample, we could say that people live somewhere
between 16 and 98 years with an average age of death of 54.9. Because
outliers can influence the average, the median or middle value is used. In
this case, that is 56.5. What this tells us is that half of the people died before
reaching the age of 56.5 and half died thereafter.
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WEALTH OF INSIGHT
OLD MUTUAL WEALTH INTELLIGENCE
Review regularly
A stitch in time saves nine. The old adage is particularly relevant in financial
planning. The more regularly a plan is reviewed, the smaller the changes
will be to get things back on track as circumstances change.
The median is the number that you will see in articles about longevity.
Obviously, much larger samples are used, but the process remains similar.
Therefore, when you read that the average lifespan for a male is about
80 years, what that actually means is that 50% of people will die before the
age of 80 and 50% will die later. You will also have read that this age has
steadily been increasing because of changes in our diet, the types of work
we do and advances in medical technology.
The bottom line: Remember that average numbers are interesting, but for
individual clients you will have to consider a wider range of outcomes when
giving advice.
The fact that, on average, people are living longer than before is interesting,
but not particularly useful when dealing with an individual client. This number
wasn’t particularly useful when the average lifespan was 60 or 70 and that
hasn’t changed now that the number is 80 and increasing.
Averages mean very little to your 65-year old client. He could live to 66,
80, 90 or 120. There is no way of knowing. There really is no way to
determine how long a client might live. While genetics may have some
influence, basing this assumption on how long a client’s parents lived is like
trying to determine the winning Lotto numbers by looking at last week’s
winners. And in the case of a client’s future, this isn’t something you want to
take a chance on. If you have been including that question as part of your
standard conversation, my advice is to throw it out altogether. All it’s going
to do is give you a false sense of certainty that could end up being catastrophic
for your business and your clients.
So, what to do?
Explain this to the client
It may sound like a no-brainer, but have the conversation with the client.
Acknowledge that there is uncertainty and that part of the planning process is
to deal with it. You don’t know what the future will bring, so don’t give the idea
that you do. Your job is to put robust plans in place that can withstand change.
Plan for uncertainty
Try out different scenarios. Don’t just use average investment returns – consider
what would happen if markets underperform. Test the plan if the client should
live to 80, 90, 100 and 120. Test what would happen if the client’s house
burnt down. Look at all the possibilities. Don’t only assume that things will be
perfect.
Consider other options
To achieve specific goals there are basically four variables that can be
manipulated. Saving more, spending less, investing differently and adjusting
the timing of the specific goal. Choosing the correct investment strategy is
important, but remember to consider the other variables as well. They all
work together to get to the desired outcome.
Think about guarantees
In the context of retirement income, uncertainty of timeframe and investment
returns are major considerations. A guaranteed annuity for a portion of the
income is one possibility of dealing with this uncertainty. Keeping drawdown
rates from living annuities and discretionary investments low is equally
important. As a rule of thumb, drawing more than 4% of assets a year is
considered very risky.
Old Mutual Wealth is brought to you through several authorised Financial Services Providers
in the Old Mutual Group who make up the elite service offering.
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