Longevity Risk

Longevity Risk

I see financial advising as a mix of many skills. Sometimes it’s that of investor psychologist, but in the nuts and bolts of it I’m a risk manager. A topic I give a lot of thought is, “How long will my clients live?” My biggest goal for my clients is that they never run out of money and that it’s managed in such a way that it lasts them their whole lives. The million dollar question is when that will be. If knew they’d drop dead in exactly 12 years it would be a relatively easy thing to plan for; however the issue of how long people will live is becoming, weird.


A few current statistics for life expectancy. First of all, let me just state that the best way to view life expectancy is as a household. If it is just you, then you only have your own life expectancy to be concerned about. However, if you are a couple then it’s both people that we have to estimate for. All things equal, the life expectancy of a couple (or when both people will be death) is going to be longer than for one person. Here are the facts for individuals and couples who have reached age 65:


  1. 50% of the following are expected to live to age:
    1. Men – 85
    2. Women – 88
    3. Couples (Surviving Spouse) – 92
    4. 25% of the following are expected to live to age:
      1. Men – 92
      2. Women – 94
      3. Couples (Surviving Spouse) – 97


A way to look at this data is that for someone retiring at age 65, you should could on a 25-30 year retirement. To personalize this, consider all of your money added up and stretch it out to your life expectancy; how much should you be spending? Okay, now add into this that by the time you die the cost of everything you buy will be about 2.5 times more expensive than it was when you retired. It all the more illustrates how projecting these realities and looking at where people have money is the crucial task. Mostly people’s biggest concern is loss of principle (such as the stock market going down); however, this punctuates the risk of living a very long time.


The “weird” thing about life expectancy is that rapid developments in medical technology is quickly pushing life expectancy up. A few months ago, a team of researches took cells from a woman’s bladder and grew, from her own cells, a new one and switched it out with her failing bladder. This is not science fiction, there are thousands of people walking around with brand new body parts grown from their own cells. By the end of the decade, it’s projected that all major organs will be replaceable. There are also developments in technologies that could cure diabetes, blood clots, various viruses and many others. It is one thing to look at these life expectancy numbers, but what year would you turn 90 years old. For someone 65 years old today, this would be the year 2036; what additional technology will come along to push life expectancy even higher? The imagination runs wild, the possibilities are endless … except for the possibility that advances in medicine could cause your retirement funds to be depleted since you hadn’t planned to live this long. This is where a financial advisor comes in.