Journal of Financial Planning: March 2022
Alexandra Armstrong, CFP®, CRPC, was one of the first female CFP® practitioners in the United States, as well as the first female president of the IAFP (precursor to the FPA). She founded her financial planning firm in 1983 in Washington, D.C. Since then, she has focused on helping women achieve financial independence. She is the coauthor of Your Next Chapter: A Woman’s Guide To A Successful Retirement.
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Much as we financial planners try to quantify the future, retirement planning is far from an exact science. It would be much easier if we knew how long our clients were going to live, how they were going to die, and how the markets and tax laws were going to change over the years. But the fact is we can’t foresee what the future will hold with accuracy. All we can do is our best.
We know what our job is—which is to help our clients accumulate enough money to get to the point when they can retire in comfort, which means something different to each person. We also need to guide them through their retirement years to make sure their money lasts as long as they do so that they can leave something for their heirs.
Although we as advisers are aware of the impact of longevity on retirees, surprisingly enough, 43 percent of retirees and 38 percent of pre-retirees underestimate life expectancy by at least five years, according to a 2021 survey from the Society of Actuaries.
Longevity Implications for Women
As we have said in earlier articles, longevity is a major issue particularly when planning retirement for women. In the simplest terms, since most women live longer than our male counterparts, our money has to last longer. In the case of planning for a couple, advisers need to estimate how long each partner is going to live—impossible as this task might be.
However, retirement planning for women gets more complicated. Not only do we live longer than men, the length of time we live has increased over the years (although I realize COVID-19 may change these calculations). To illustrate this point, according to the U.S. Department of Health and Human Services, in 1965, life expectancy in the United States for men was 66.8 years and for women 73 years. In the first half of 2020, life expectancy for men had increased to age 75.1 and for women to age 80.5.
But these projections are just average numbers. Numerous studies have indicated that wealthier people live longer than lower income people. A study published in the Journal of the American Medical Association, financed by the U.S. Social Security Administration, studied the period 2000–2014. According to this study, “The Association Between Income & Life Expectancy in the United States, 2001–2014,” men in the top 1 percent income bracket were expected to live to 87.3, which was 14.6 years longer than those in the bottom 1 percent income group. Women in the top 1 percent were expected to live to 88.9, which was 10.1 years higher than those in the bottom 1 percent.
Further, inequality in life expectancy increased over time. Higher income was associated with longer life at all income levels. I am not saying all our clients are in the top 1 percent, but the statistics indicate that wealthier people live longer.
My initial reaction to these statistics was that the reason higher income people live longer was because they could afford better medical care, although this particular study dismisses that theory. Also, since this population can afford to pay for caregiving, they experience less stress, which contributes to longer life. At our firm, we have five clients over age 100 (all women) and several over age 90.
When we calculate retirement projections, we first talk to our clients about their family health history as well as their own. Depending on the information received, we may use as high as 100 as the death age factor. However, this approach may be too simplistic.
One of the thought leaders on this topic is Carolyn McClanahan, whom I have heard speak numerous times at FPA conferences. She is a former medical doctor and applies her medical expertise to her clients. She recommends her clients take the “Living to 100” online test. In addition to predicting how long you might live, this report makes suggestions as to changes you can make to your lifestyle to prolong it. Obviously, with a couple, they each should take this test so you can plan for both their lives.
Something else to consider—although we talk about women outliving men, little is said about the period of caregiving a spouse needs before death. Currently, I am living in a retirement community where I have noticed that often there is a period before a spouse dies when the spouse’s health deteriorates and the other spouse becomes the caregiver. This period is draining financially and emotionally and can last for years. Being aware that this is something that your client may be going through will help you be of assistance to your clients.
Impact on Identity
Since there is a good chance your client will live longer, she needs to consider how she is going to spend those 20 or 30 “golden” years. In the early years of retirement planning, advisers focused only on the financial calculation. In more recent years, many advisers realized the importance of achieving happiness in retirement.
Twenty years ago, I heard Mitch Anthony, author of New Retirementality, speak at another FPA conference about his parents who were retired and their friends who had enough money but weren’t happy. As he commented in the preface to the fifth edition of his book: “Money is part and parcel of the retirement discussion but is not the primary component. . . . What needs to be planned for is much bigger than the accumulation and distribution of your means. Having the means to retire is important. . . . what we also must plan for—but often don’t—is meaning.”
I think this issue is particularly relevant to our clients, many of whom have held demanding jobs that enabled them to achieve financial independence. All of their lives, they have had goals to achieve—getting through school, landing their first job, moving up in their careers, getting married (if they so chose), buying their first or second home, having children and grandchildren. Their identities were tied up in their successes.
The need to adjust to this new period of life has always been present for men, but now, with more women in demanding jobs, they also are grappling with adjusting to their loss of identity and purpose after they retire. Conceptually, it seems great to have all this free time—but what are they going to do with it all? As advisers, we should be aware of the emotional adjustment they will have to make when they retire and how difficult it may be. They may need more of our time, particularly during the first year of change.
Impact on Relationships
Some married people, when they realize they may live for 20 or more years with their current partner, may have second thoughts. How will they adjust to having so much togetherness after years of living separate lives? How much do they really have in common with their partner? “Gray divorce,” as they call it, is not uncommon at this stage. As couples adjust or don’t adjust to this new phase, they may decide that they don’t want to spend the rest of their lives together!
When your clients first retire, they need to be prepared for how other relationships may change. For instance, they may find that they no longer have as much in common with their friends from work. Since socialization is a major key to happiness in retirement, they should be encouraged to develop new friends through their activities or volunteer work. Their family may expect them to spend more time with them, possibly taking care of the grandchildren. This may or may not be a good idea. From the beginning, your clients need to make sure it is clear with their children what they are willing to do or not do. Otherwise, family discord may result.
Impact on Expenses
We have all seen the formulas for how to make sure you don’t outlive your money, which I believe to be an impossible task. One of the first advisers who tried to do this was William Bengen. His so-called 4 percent rule has been debated and modified over the years, but the fact is expenses don’t remain constant, even adjusted for inflation.
We think a better approach is for our clients to view their retirement as in three phases. The first stage is what some call the “go-go years,” when they do all the things they have wanted to do now that they have the time, money, and energy to do them. Prior to COVID-19, travel and time with the family were major priorities and still are. The second stage is the “go-slow” years, when their lives have settled down into more of an established routine. Typically, their expenses will be lower than in the first phase. Finally, in the “no-go” years, their expenses will be more health-related. Their major expense will be paying people to help them with various tasks such as paying bills and caregiving.
Impact on Value of Advice
Our goal is to help clients retire successfully financially and emotionally. As our clients age, they often become more dependent on us. We have all read about older people being defrauded and may have even experienced it with our clients. We as financial planners are usually the first to detect memory loss issues. This is the time to bring in family members and other advisers who can make sure that they are guided during their final years successfully.
Conclusion
In sum, living longer has much broader implications for women than simply running out of money. We can bring true value to our clients if we are aware of the issues they will be facing and share that information with them so they can be prepared. By helping them navigate through this major period of their lives, both financially and emotionally, we will have done our job. In my opinion, this is what makes our profession so rewarding!
