USA, New York, Water Mill
As Gen Xers reach their 40s and 50s, they are starting to focus more on their retirement planning. One of the key steps in this process is to start working with a financial planner or other similar adviser. The addition of a planner to the process can often amplify the results in a positive fashion – even if the concept runs contrary to the Gen X march-to-their-own-drummer style independence.
The planning experience provides benefits, but there are some common missteps that can occur regardless of the client’s wealth level or positive relationship with the advisor. In developing a retirement strategy, planners typically use a form of Monte Carlo-style analysis in which historical returns are coupled with a series of assumptions on income, assets and spending. This helps them determine if the client has sufficient assets to meet their cash needs throughout their life.
For this analysis to be useful, the quality of the assumptions must be accurate, otherwise you may find yourself in something of a “garbage in, garbage out (GIGO)” situation. This expression was coined by an early IBM programmer and instructor who used it to remind students that a computer simply processes what it is given. It’s no surprise that it also applies to retirement planning.
The need for accuracy in assumptions applies not only to income and assets, but also longevity. As Gen Xers recognize that they may live longer than their Silent (1925-1944) or Boomer (1945-1964) parents, the longevity assumption could be the key to success.
The Longevity Factor
As Gen Xers are helping their parents navigate their 70s, 80s, and 90s, it’s clear that longevity may be a burden if not planned for correctly. When long term scenario planning was done for their parents, the age assumptions may not have considered that living into their late 80s and 90s would be a common experience.
Life expectancy is constantly changing. When the first Boomers were born in 1945, the average lifespan was 63.3 years for men and 67.9 years for women. That was an increase over the averages for Silents born in 1925, which at that time were 57.6 for men and 60.6 for women. Seventy-five years later, the average lifespan has increased dramatically. For a baby born in the United States in 2019, the average male’s lifespan is projected to be 76 years and average female is 81 years, an increase of almost 14 years compared to Boomers.
Given medical breakthroughs and technology, Boomers and Silents are often living much longer than their projected lifespans at birth. But living longer doesn’t mean living better. This is precisely what Gen X must remember when addressing their own retirement planning.
Assumptions on longevity must be applied correctly in retirement planning. In the late 90s and early 2000s, it was not uncommon to use 85 or 90 as the end point. But Gen Xers must insist to see numbers drawn out to 100 because an analysis showing success for an endpoint of age 90 might be a very different picture from one using an endpoint of age 100. In fact, using 85 or 90 as the end age in a Monte Carlo analysis is simply a garbage assumption.
Joint Life Expectancy Has Pros – and Cons
For couples, married or unmarried, joint life expectancy is also an important consideration. It is unlikely that a couple will pass away at the same time, thus factoring in the longevity of a surviving partner is critical.
For example: a heterosexual Gen X couple where both partners are 50, the male partner has a 38% chance of living to age 85, whereas the female partner has a 50% chance. As a couple, they have a 69% chance of one of them reaching age 85. When using age 90 as the longevity assumption, the likelihoods change to 18% for the male, 30% for the female, and 42% for the couple.
Gen Xers should challenge their planner to extend the longevity scenarios as well as factor in expense assumptions at a commensurate level. What is spent on ‘fun’ retirement activities in your 70s and 80s, might shift to cover more extensive medical aid or living needs in your 90s.
It’s On You To Make Sure Its Factored In
As Gen Xers are hitting their prime wealth building years, there should be a focus on making longevity a blessing and not a curse. Working with a profession financial planner can be a huge benefit to the retirement process, IF the correct assumptions are used. Gen X cannot be passive in their planning but must demand to see extended numbers. While a planner may be apprehensive that Gen X clients could be wary of the planning process in the short-term if they see vulnerabilities, it is absolutely critical that they help clients recognize the positive long-term impact in order to navigate and plan for a long lifespan. Otherwise it’s just garbage in, garbage out.
