By Russ Hill, CFP®, AIFA®, Chairman/CEO featured in Financial Advisor Magazine
Longevity is a common conversation topic in financial planning circles these days, largely because more people are reaching advanced ages in relatively good health. It’s not always clear how people, including the clients of advisors, will make the most of these extra years.
As experts who help people plan for their future, we have a professional as well as personal interest in this topic at our firm. But what do we mean by longevity? Is it how long you live? How long your health holds out? How long your money lasts?
Is it about having enough time to achieve your lifetime goals or whether you have time to teach or give to others?
Whatever it means to you and your clients, your success at achieving your goals will depend on your ability to earn, your willingness to learn and your environment. That means becoming familiar with a complex array of topics—finance, health, ethics, intergenerational relations … maybe even the meaning of life itself.
Yet too often conversations about longevity are reduced to that first question: “How long will I live?” People bypass the deeper questions of purpose and ultimately go straight to topics such as ice baths or restricted diets. Interesting ideas, but hardly the whole story.
I address these ideas in my book Optimizing Longevity: A Road Atlas for a Happier, Less Predictable Life. I wrote it from my perspective as a financial advisor, but the subject goes beyond mere finance.
I’ll try here to give you a glimpse of the book’s core concepts.
Starting From ‘Here’
There is a story, told in various cultures, about a man lost in the countryside who asks a local the way to his destination. The local shrugs and says, “Well, I wouldn’t start from here.”
Life has never gone according to a schedule. Although it has always been tempting to think it will, people have found it increasingly impossible to follow one.
Technological and social change has made it harder to evade sudden, unexpected life changes (what some people have called “lifequakes.”) As more of us live to an older age, planning errors have more time to compound, and that can make a mess of what might otherwise be a happy opportunity to live longer. In the past, people might have been able to rely more on government and institutions to help solve these problems. But that’s changing, and financial planners will need to pick up the slack.
Before we can start helping our clients, we have some work to do on our own processes. Most financial planning still relies on long-term projections that make assumptions about lives that will be lived out predictably. That kind of thinking won’t fit the coming age.
A Road Atlas
If we think of life as a road trip, what is the best way to plan for it? You can plug in your desired destination and passively follow a GPS-guided route. This is a bit like typing your desired retirement age into a robo-planner and following whatever the readout says you should do.
Alternatively, you can spend some time with an old-school road atlas before the journey begins, checking out the territory and the opportunities for detours—or even changes of destination if the trip doesn’t turn out as expected. This, of course, is more difficult than simply following the GPS. It’s easier to just take directions.
But what if life is becoming more fluid? We might find it frustrating having a fixed route or destination (where we say retire at age X, maintain income of Y and keep expenses regular and not exceeding Z).
The alternative approach to planning considers direction over destination (asking what you need in your life to be happy), and taking shocks and detours for granted (including career shifts and location changes) instead of falling apart when they occur.
That’s all well and good, but how do you do this systematically and with actionable results?
The Stanford Center on Longevity has tried to create a framework: the New Map of Life project, which it launched in 2018. The center convened a cross-disciplinary body of researchers and experts to take on the problem of an aging society: It came up with a robust set of recommendations, including various ideas for new infrastructure and public program reform.
The New Map of Life requires a perspective on wealth management in the broadest sense, where wealth encompasses not only finances, but health, education and investing in the next generation.
Planning Versus ‘The Plan’
We don’t know what the next 30 days will bring, let alone the next 30 years. This creates a paradox: How can we plan for an unplannable future?
If someone put a gun to my head and gave me five seconds to answer that question, I would probably say that we should use what’s called the “personal funded ratio.” This is a powerful tool that helps us communicate the fundamental uncertainty of financial projections to clients, while reassuring them that they are still OK.
You may be more familiar with the ratio under another name: the “resources/claims ratio.” In practice, it allows a client to gauge their financial situation by comparing what they have with what they owe, factoring in the discounted present value of future income and expenses as well.
The Personal Funded Ratio
The ratio is a way for clients to check in after life has thrown them a curveball (if, say, they have a new child or a new dependent or they’ve suffered a business failure) and see how things have changed. They can still make plans, as long as they never stop updating them.
But there is another important aspect to the ratio—it forces a conversation about meaning.
Money has a function that goes beyond simply putting a roof over your head (just as financial planning—and life in general—is about more than avoiding insolvency). Money is also a tool for making things you want to happen happen. To calculate your future obligations, desired spending, and how much you need to save or invest, you need therefore to understand what is important to you.
This can get complicated. For instance, what if your client has a spouse with differences of opinion about what matters, things that might not ever have been fully articulated? Getting to these desires and resolving these conflicts should be the first step in the financial planning process.
There are many potential happy endings to a person’s story, even if only one or two of them turn out to be feasible. Knowing what constitutes a happy ending in one’s own specific case makes it possible to spot one when it comes around, or when a previous plan comes asunder.
If planning is done in this way—with readiness for the off-ramps, to extend the GPS metaphor—then those ramps, while inconvenient and stressful, are much less likely to threaten or derail a client’s happiness or sense of a life well-lived.
At the same time, no amount of excess retirement savings can make up for a deficit of meaning.
The Financial Tool Kit: Old And New
Some aspects of financial self-management never change. The old rules and guideposts on how to accumulate wealth (for example, the importance of compounding and diversification) are largely the same. So are the well-documented investing pitfalls (such as volatility drag, tail risk, etc.).
While many things are within a client’s direct control, it’s no mean feat for them to navigate the rapids of an ungovernable future. It involves many moving parts—financial instruments, legal structures, government programs, and so on.
Yet the fundamental approach to planning is still based on the shaky concept of a stable world and a uniform, three-stage pattern: that you should accumulate, then retire, then unwind assets. We could rely on these rules before because we could often anticipate where someone was going to be at a certain age. But those life stages have changed, and the target ages aren’t as informative as they were. Age 65 is no longer the North Star of retirement.
People have changed lifestyles in other ways that change the math on investing. What about the 30-year-old who takes a career break? Suddenly they’re in a decumulation phase, too. Or imagine the retiree who is working part-time. They still might be accumulating (or at least bringing in more than they’re spending). In other words, the rigid age-based approach has lost its relevance in many situations.
The best alternative approach I’ve seen is inspired by professor Moshe Milevsky and his idea of regarding people as financial instruments in and of themselves (the name of one of his books is Are You a Stock or a Bond?) In his mind, we shouldn’t necessarily be looking at a person’s age and then trying to deduce what they should be doing in terms of insurance, saving, risk exposure, etc. Instead, we should be looking at the mix of human capital to financial capital—the left-hand side of the personal funded ratio—covering current assets and expected additions.
Intuitively, someone with a lot of human capital will be more focused on accumulating, and someone with a lot of financial capital is going to be closer to unwinding assets. Most people will be somewhere between the two extremes, with age playing less of a role than before.
The Final Problem
Not everyone can—or wants to—keep earning indefinitely, and so the question of how to handle decumulation remains, no matter how uneven the downward slope turns out to be.
The main thing that has changed is our uncertainty about the length of our lives. It isn’t a trivial thing to add two or three (uncertain) decades to a model’s assumptions. Many of us have grown accustomed to an ever-booming stock market, but that might not be sustainable. I think that we need a new solution.
My personal view is that annuities are not completely up to the task of addressing this dilemma. They’re expensive for insurance companies to sell, reserve against and administer. The payments normally aren’t protected against inflation. And where annuity payments are fixed, people’s expenses are often lumpy. It’s difficult to withdraw money from annuities earlier than you expected and it can actually be expensive. In my book I talk about one possible solution—tontine funds, which involve paying into pools. Such vehicles give us hope that the problem can be solved.
As these and other new vehicles emerge, individuals and advisors should apply extreme caution in assessing not only whether a product is viable in theory but also practical in someone’s personal circumstances.
The Road Ahead
How are we going to update financial planning to make sure our clients are ready for longevity? The answer involves not just finding out how people will manage their finances, but how they will help their own dependents manage their futures and the future of their children.
The stakes are getting higher, which means that the need for solutions is more pressing. But the size of the prize is greater, too. If we do our part as advisors, we can help our clients do more than add years to their lives—they can also add life to their years.
