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Are Your Clients Average or Above Average? October 1, 2007 By Scott Whittemore How do you estimate life expectancy for a client? Do you use actuarial tables? If you do, be very careful. They are averages. The only thing that is certain is that your client is not average. Common financial planning software defaults a client’s life expectancy to 85, which is about average. What happens if the client spends down their retirement funds and they outlive the average? Disaster. Moreover, when looking at an average, remember that 50% of people will pass away sooner, and 50% will outlive the average. What would happen as your client neared that actuarial demise date and realized he was running out of money? While I do not have statistics to back this assertion, I suspect that clients who are concerned about saving for retirement and seek out the advice of an advisor are likely to live longer than average. Like the children in Lake Woebegone, all your clients may be above average. The fact that people who are concerned about their retirement will live longer is based on a couple of known facts about life insurance and annuities. In the life insurance industry, a known fact is that people that are the highest risk will want the most life insurance. People with health issues or family history of health issues are going to be a lot more aware of the value of life insurance. The opposite of this fact, is people age 65 to 75 who buy annuities have a mortality rate about half the general population. In other words, people who realize they are going to live a long time want annuities. Extending the logic of annuities, the people who save for retirement realize that they will probably live a long time and want to be prepared. So how do you use actuarial tables? Start by using the tables that show life expectancy based on a persons current age. For example, actuarial tables show that there is a 50% chance that one member of a healthy 65-year-old couple will live to age 92 and a 25% chance that one will live to 97. This table eliminates all the people who have already died younger than 65 years old and gives you a more realistic idea of the longevity risk. However, this data is still averages. How do you figure out if your client is going to be "above average?" Personalizing the data by finding out about the health history of the client and their family is very important. If their parents have had long lives, they definitely need to add on some years to their life expectancy. Learning more about your client is always a good thing. Talking about life expectancy is an excellent reason to talk to your clients.

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