How Long Will You Live?
One of the biggest challenges to planning your financial future is predicting how long you will live.
Let’s face it, if you knew you only had a year or two left you would do things very different than if you were sure you would live for another 50+ years.
So how do you decide how long to plan for? You’ve probably heard that the fastest growing demographic is people over 100. But does that mean you need to plan for a life expectancy of 100 years or more? Not necessarily. Like everything in the realm of financial planning it’s all about probability. What is the probability that you will live to 100? What are the risks if you don’t plan for that long?
FP Canada Standards Council recently released it’s 2019 projection and assumption guidelines.Their recommendation is to assume a projection period where the probability of outliving one’s capital is no more than 25% and takes into account one’s individual circumstances (e.g. gender, smoker, place of residence, evidence of good health, etc.) They also recommend that you should conduct a sensitivity analysis related to mortality (e.g. +/- 5 years).
It is interesting to note that in spite of what we may think, hereditary factors are not significant in predicting life expectancy. Lifestyle and gender play a much more important role. It’s also interesting to note that advances in medical science will have a greater effect on the lifespan of younger people than those already into their senior years. For example a 30 year old today has a higher life expectancy than their 60 year old parent (see table below-this chart looks at your probability of survival based on your current age and your gender. It also predicts the probability of at least one member of a mixed gender couple’s survival (M/F).)
Based on this table and the FP Standard’s recommendations, A 35 year old couple would want to prepare their financial plan based on the assumption that the male would live to age 94 and the female to age 97 or at least one of them to age 98 (+/- 5 years).
A good financial plan lets you see the effect on your financial situation of living longer or dying sooner. It also provides the opportunity to explore different insurance options to see how it can provide for your family’s needs if you were to die prematurely.
To quote Michael Curtis, the founder of VisionWorks financial planning software “The purpose of planning is to master change. We all have to manage it. The only way to master it is to use realistic planning software that acts as a ‘practice field’ for real life. VisionWorks enables your clients to test their options and assumptions so that they can see the long-term impact and thereby make the most informed decisions possible.”
Consider our example of the 35 year old couple. Will they have enough capital accumulated during their working years to survive to age 98? What if one of them lived to 103? What if one died at the young age of 50? If your financial plan doesn’t provide you the opportunity to explore these possibilities, you may end up simply coping with the changes life presents not mastering them. Which would you prefer?