Life expectancy estimates are “useless” for financial planning and advisers who use them for cashflow modelling risk their clients running out of money in retirement, Partnership chief executive Steve Groves has warned.
Speaking at the Institute of Financial Planning’s annual conference in Newport last week, Groves (pictured) said the average life expectancy for a 65-year-old male is 86.5 but 22 per cent of men aged 65 will live to see their 95th birthday.
He told delegates: “Life expectancy is pretty much useless for financial planning. All it tells you is the point at which 50 per cent of people are dead.
“So if you plan to decumulate to life expectancy and you get it perfectly right, half your clients will run out of money.”
Experts say advisers must ensure they manage the risk effectively.
UBS Wealth Management executive director Graeme Price says: “This is an important point for cashflow modelling as many financial planners will cashflow model to life expectancy.
“There is a need to manage the risk of outliving the average life expectancy.
“One option is to buy an annuity but there are others, too, such as holding certain assets on a yield basis.”
Pilot Financial Planning managing director Ian Thomas says advisers need to research life expectancy thoroughly, be proactive in discussing it with clients and monitor it on an ongoing basis.
He says: “I have done a lot of research on this which I keep on file for compliance reasons. It is based on Office for National Statistics data and combines average life expectancy with the likelihood of living to 100.
“I make a point of engaging clients in this to make sure they also feel it is a sensible assumption.
“Further to that, financial planning is an ongoing process so various uncertain factors, such as spending patterns and inflation, are kept under review and life expectancy should be part of that.”
It is very difficult for advisers to do due diligence in this area. The trouble is that with a retrospective regulatory regime, they are damned if they do and damned if they don’t.
To ignore the Continuous Mortality Investigation data – which combines Office for National Statistics data with statistics from life companies – in their planning process would be reckless.
But average figures tell you nothing about each individual customer because you do not know where they lie on a normal frequency distribution.
There is also a growing view that the CMI data may be misleading because it does not conform to normal frequency distribution, so the mean average may give a very skewed view of the figures.
For advisers, it boils down to knowing your client. You have to ascertain the client’s appetite for risk – are they prepared to risk running out of money? Advisers should take life expectancy data into account but they must also consider their client’s health.
Richard Hobbs is an independent regulatory consultant
Pete Matthew, managing director, Jacksons Wealth Management
Most financial planners would take life expectancy averages as a starting point but also ask intelligent questions about health and family longevity. Any assumption can be pie in the sky if it is looking more than three years ahead so the key is to revisit cashflow modelling regularly.