Call it Six-Figure Fatigue. Say you're preparing a financial plan for a 65-year-old client who is retiring and wants to receive an inflation-adjusted $100,000 annually. One of the questions you probe delicately for direction is how long he has to live. Assume 20 years, a plausible average in a developed country these days, and your client would need a nest egg of $1,504,000. But what if he doesn't hug the average, and lasts until he's 95? He then would need an additional $486,000 at the get-go, nearly one-third more cash.
You can ask him how he's feeling, and how his parents' health has been. But did you ever have one of those days where you wondered just how much easier it would be if you knew, within a reasonable margin, when your client would die?
Financial planners may have taken heart last month when a new study from researchers at the Boston University Schools of Public Health and Medicine and the Boston Medical College made headlines across the country. Scientists working with a pool of more than 1,000 men and women aged 100 and up had 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. Dr. Thomas Perls, one of the team leaders, said they expect to post software on the Internet that would allow for the development of computerized tests to help identify whether someone has the markers.
The geneticists cautioned that the identifying markers are not perfect, and that their findings require further study to understand how and why they are linked to longevity. And, of course, they can't be considered apart from environmental factors such as diet and smoking habits when evaluating one's prospects for a long life, they said.
But what are the implications for financial planners? A client's longevity is certainly an important but slippery variable to assess when calculating cash needs for retirement. In most of the developed world, the average lifespan runs from 80 to 85 years, but averages don't help much when you are talking about individuals. The new research could certainly help reduce uncertainty about an individual's potential lifespan and the duration of an individual's retirement — within reasonable limits and for those individuals who actually want to know what their genes say about how long they will live.
“People are usually pretty confused about how long they have,” says William Baldwin, president of Pillar Financial Advisors in Waltham, Mass. and chairman of the National Association of Personal Financial Advisors. When Baldwin sits down with clients, he asks standard questions about their health, whether their parents are alive and, if so, how healthy their parents are. Baldwin then consults actuarial tables, and likes to run a Monte Carlo simulation to determine probability ranges for whether a client's money will last until the estimated time of his death.
Planners rarely get these estimates right, says Robert Glovsky, president of Mintz Levin Financial Advisors in Boston and chair of the Certified Financial Planner Board of Standards. “You're sitting here trying to project out somebody's life expectancy, somebody's asset base. There are a lot of assumptions, mortality being just one of them. It's modeling. You can't look at it and say, ‘I know definitively what is going to happen.’”
Some advisors already stretch their longevity assumptions for clients when making retirement savings calculations, says Susan Hartman, an attorney and certified financial planner who works with advisors at Raymond James Financial, the independent broker/dealer. The company asks its advisors to calculate longevity of most clients to between 92 and 95 instead of lower ages that are closer to national averages, she says; it 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.
“Genetic markers don't pinpoint exactly. They just say, ‘You have a propensity to live to this age.’ If the person takes good care of himself or is lucky to avoid an accident, he's going to live longer perhaps,” Hartman says. Planners can offer clients a range of scenarios — dying early, dying when you expect to, and dying five years later — to give them some sense of their financial options. “The farther out you get, the less chance you have of being correct,” she says.
But Glovsky suggests that a test for longevity markers would be useful if it could help clients consider how long their assets need to last. Conversations about long-term-care insurance and annuities might play a bigger role in planning, he says. And test results that showed someone does not have the genetic markers for longevity could be as useful as results showing they do, he adds; if you have good reason to believe you will not live until 100, your spending priorities might change dramatically. “It's a conversation you have with your client. Are you comfortable planning for less, now that you know?” he says.
The prospect of knowing how long you might live could have other planning implications as well. Glovsky wonders if insurance companies would change pricing and benefits if they understood their clients' longevity prospects better. The issue has drawn national attention. In 2008, President Bush signed the Genetic Information Nondiscrimination Act, which prohibits discrimination in health coverage and employment on the basis of genetic information. Among other provisions, insurers and health plans generally are barred from requiring consumers to submit to genetic tests. The law, however, does not apply to life insurance, disability insurance, or long-term care insurance.
Some insurance companies welcome anti-discrimination legislation as long as it levels the playing field and doesn't offer one company an advantage over another, says Paul Root Wolpe, professor of bioethics at Emory University. “I think we're very close to having the technology to decode people's genomes in a cost-effective way,” he says. The larger question, however, is whether that information is necessarily worth having. People may make lifestyle changes if they find out from genetic testing that they face, say, a 20 percent chance of contracting cancer, he offers as an example. There's still an 80 percent chance that they won't.
“You tend to think of genomes as a magic fount of information that tells us things that are secret and mysterious, when in fact I'm not really sure that that kind of information actually contributes that much,” Wolpe says. “If you give me a big group of 100 people in a room and I put them in groups that look overweight and groups that don't, I already have done a fairly good job of statistically separating them in terms of their likely lifespan. … We've got hundreds of years of actuarial science to set (insurance) rates that seem to work.”
How much information is enough? At the end of the day, investors may not be clamoring to know how long they've got. “Most of our clients don't really like this stuff,” Baldwin says. “They just want to feel comfortable and they want us to say to them, ‘You're OK at this level,’ or ‘You're not.’ And that's why it's our responsibility. We can't assume they know they're making a mistake when they're overspending money.”