A very important part of a client’s financial plan, that will indeed impact upon a client’s financial strategy is how long they and where applicable their partner is going to live.
Our default age is 100, although we can be flexible.
So, why do we project to age 100 when according to the Office for National Statistics the average life expectancy for a 50-year-old male is 84, and that he has a 4.4% chance of living to age 100?
Statistically therefore, projecting to age 100 is overly optimistic. However, for cash flow planning, this is in fact more pessimistic because living longer costs more. For example:
- Pension withdrawals – will necessarily be lower if they need to be sustained for an additional 16 years
- Care costs – assuming “worst case” scenarios where a client might need care for an extended period, e.g. from age 85 to age 100 as opposed to the norm 4-5 years.
- Market crashes – adopting a strategy that is stress-tested and sustainable even if clients outlive the average
- Overall liquidity – ensuring that we can ensure clients have no liquidity problems even if they survive 16 years beyond their expected mortality
As with all assumptions, we like to be cautious and prudent and assuming our clients do live to age 100 is very prudent, and of course, such projections show the financial projected position at all ages prior to age 100. Further, socio-economic conditions for high networth individuals are better resulting in a longer life expectancy. Also, the FCA expect all analysis for Defined Benefit pension transfers projections to take a client to age 100, again taking a prudent approach.
However, we have to be very careful that we are not being overly cautious that could encourage ‘under living’ and spending or gifting less just in case, resulting in a big pot of money been taken to the grave, maybe a tasty IHT liability for the estate and more concerning things and experiences not enjoyed today or in the future.
Remember, the goal is to die with memories, not dreams, or to quote one of our very wise clients:
“If you can’t afford to do something and you do it, you’re a fool. If you can afford to do something but don’t, you’re an even more of a fool”
It is important therefore that you agree a sensible life expectancy and continue to review this with your financial planner at regular intervals. You can stress test your financial plan and cash flow projections with a variety of personal and financial assumptions including changing life expectancy dates.
Helpfully, the Office of National Statistics have put together a life expectancy calculator that can be accessed on the below link.
With thanks to our cash flow partners Prestwood Software for providing some of the data.