Whoever said, “The devil is in the details,” certainly had something important to say about modern retirement planning. Retirement plans that may seem well assured can sometimes have “small flaws” that will make them crash when put to the test. The success or failure of many retirements will be determined by details that may not always get the attention they deserve in the planning process.

Modeling the “new longevity” can be one of those flaws. If the client plans on dying shortly after retirement, it sure makes it easier to provide adequate means for their retirement. If, on the other hand, they plan on a more realistic life expectancy, providing adequate means is more challenging. Still more challenging, for planner and client, is taking into consideration what is likely to happen to the client’s longevity during their retirement—the rest of their lives. People are retiring earlier and earlier. Recent studies show that while Americans retire later in life than the citizens of most industrialized societies, they are retiring at younger and younger ages. It is clear that age 55 has become the most widely accepted target for “if I am able to.…” We also know that the life expectancy of older Americans has been extended more than 50 percent in this century. What is not so well known is that the rate at which longevity is increasing continues to accelerate.

In the first decades of the 20th century, the rate of change in the longevity of older Americans (65+) was changing at just .01 percent a year. That rate of change has accelerated pretty consistently throughout the century, and in the most recent decades, is approaching one percent a year, a tenfold increase. I believe that in the first decades of the 21st century, the rate of change is likely to approach 1.5 percent a year. In practice, that means our clients are likely to live a lot longer than they think, and perhaps even longer than you think. A person retiring in 2010 with a tabular life expectancy of 20 years can expect to live 26 years. The added longevity comes from the 1.5-percent-a-year change in longevity over the 20 years that they are expected to live. I generally found it difficult to convince clients that they were actually going to be the beneficiaries of the “new longevity,” and almost impossible to convince them that they would experience “21st century longevity.”

Convincing Your Client

The government has been slow to reflect these changes because of the obvious complications that they add to the Social Security and Medicare debates. It doesn’t help to have clients show you a government table showing that they have only 14.7 years to go, and you are saying, “We need to plan on you living 26 years.”

It may help to point out three important factors. First, the table shows average life expectancy; there is a 50 percent probability that anyone will outlive the median expectation. Second, your client, by virtue of his or her interest in the future, is likely to be among that 50 percent who outlive the median. They are probably getting regular medical attention, eating well, getting enough exercise and doing the other things that are likely to extend their life expectancy. Third, tables like this are backward looking. The future is like a mirror: when we try to look into the future, we are really looking behind ourselves. We only know about the past. We can only speculate about the future. My speculation, based on the trend of the last 100 years and extrapolating today’s medical news, is that longevity will continue to increase at an accelerating pace in the 21st century. Clients would often argue, “But no one in my family has ever lived beyond…” (fill in the blank). I would jolly them along by reminding them that no one in their family has lived in the 21st century.

Black Cloud of Medical Care

Convincing clients that they have to plan to live longer than they thought generally brings up a second obstacle. When they think about living to 95 or 100, they see a black cloud hanging on the horizon of their retirement. That black cloud is the specter of huge medical and nursing care costs. It is relatively easy to convince clients that the medical cost can be contained with Medicare and a good supplement, but the idea of long-term-care insurance is less familiar to most clients. It is a relatively new kind of protection, and the structure of care is changing rapidly.

Clients tend to think of nursing homes that they experienced years ago. The memory of those old nursing homes is so repulsive that they immediately go into denial. The denial comes in many forms. “We have enough assets to deal with this.” I always wonder if the 65-year-old who is saying that realizes that a typical 2 1/2-year stay in a nursing home is likely to cost $217,000¹ when they are 80 years old and likely to need it. On the other hand, there are clients who say, “The kids will take care of us.” Those clients need to be shown the data from a 1997 study published by the National Alliance for Caregiving and the American Association of Retired Persons. This study, based on interviews with 1,509 families, showed that one in four had at least one family member who had provided care for a family member or friend in the last year. A 1999 study by the National Alliance and the National Center for Women and Aging focused on 55 people who spent eight or more hours a week providing unpaid care. What they found was astonishing. The study determined that it was costing these people an average of $659,139 in lost wages, pension benefits and Social Security over their lifetime. I wonder how many children would prefer—if given the opportunity—to provide long-term-care insurance for their parents rather than take the risk that they might become part of that 3.6 percent part of the population providing care for a debilitated parent at a cost that far exceeds the cost of providing long-term-care insurance?

The potential importance of these two details—and they certainly are details rather than central issues in the retirement planning process—underscore the importance of working with clients in an interactive way to create and manage a retirement plan. In working toward an effective retirement plan, the planner has to do thorough and individual data gathering, make a thoughtful analysis, and use a process that allows the planner to model the consequences of various assumptions. Finally, the planner needs to create a system for periodic review of the retirement in order to keep the plan on track. With continuing attention to the details, there is hope that a planner can help clients get the genie out and keep the devil in.

Endnote

1. The 1998 national average was $42,000. Costs are going up at around five percent. $42,000 turns into $87,000 at five percent for 15 years. $87,000 times 2.5 equals $217,000.

Michael K. Stein, CFP, is vice president of EMSTCO, LLC, in Boulder, Colorado, and author of The Prosperous Retirement.