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Experts warn life expectancy is useless in financial planning
| Published: | 27 Oct at 6 PM |
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According to financial experts, estimates of life expectancy are of no use in cashflow modelling as the calculations might result in the loss of all capital before retirement.
In an address given at the annual conference of the Institute of Financial Planning, Steve Groves warned his audience that statistics on life expectancy proved that using them for cashflow modelling can cause clients to run out of money well before they die. Graves, CEO of Partnership, explained that an average life expectancy for a 65-year old male is 86.5 years.
However, as 22 per cent of men reaching 65 will live until their mid-90’s, as many as 50 per cent of clients whose advisors used life expectancy tools would run out of funds before they ran out of time. UBS Wealth Management director Graeme Price believes Grove’s address is important as the majority of financial advisors are known to use life expectancy –aided cashflow models.
He adds that FAs need to be able to manage the risk of clients outliving the average years of life expectancy. Annuities are one option, according to Price, but are generally regarded at present as poor deals with too many exclusions and unpopular aspects.
Holding a selection of assets based on yields is another way, but the most important aspect of the problem is persuading FAs to discuss the issue with their clients in an open manner.Ongoing monitoring is also essential, taking into account uncertainties such as inflation and patterns of spending. These, along with life expectancy, should be kept under review on a regular basis.
In an address given at the annual conference of the Institute of Financial Planning, Steve Groves warned his audience that statistics on life expectancy proved that using them for cashflow modelling can cause clients to run out of money well before they die. Graves, CEO of Partnership, explained that an average life expectancy for a 65-year old male is 86.5 years.
However, as 22 per cent of men reaching 65 will live until their mid-90’s, as many as 50 per cent of clients whose advisors used life expectancy tools would run out of funds before they ran out of time. UBS Wealth Management director Graeme Price believes Grove’s address is important as the majority of financial advisors are known to use life expectancy –aided cashflow models.
He adds that FAs need to be able to manage the risk of clients outliving the average years of life expectancy. Annuities are one option, according to Price, but are generally regarded at present as poor deals with too many exclusions and unpopular aspects.
Holding a selection of assets based on yields is another way, but the most important aspect of the problem is persuading FAs to discuss the issue with their clients in an open manner.Ongoing monitoring is also essential, taking into account uncertainties such as inflation and patterns of spending. These, along with life expectancy, should be kept under review on a regular basis.
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