Financial literacy grabs most of the headlines when it comes to helping people of all ages better understand their financial situation and identify their money values. Indeed, forming financial goals and setting a plan requires a lot of legwork. What is not talked about as much is the importance of getting workers late in their careers and those in retirement to understand the dangers of longevity risk. Teaching these seasoned investors techniques to better manage that risk, while preserving their current nest egg, is a growing challenge for today’s advisors. 

A study released in August by the TIAA Institute and the Global Financial Literacy Excellence Center at the George Washington University School of Business revealed that Americans are simply unaware of how long they will probably live and the potential cost that comes alongside. There is a knowledge gap here, and it is the duty of financial planners to construct a bridge so that older members of Gen X and baby boomers are not caught flat-footed by rising expenses later in their retirement.

Taking Clients to the Classroom

The report found that only 12% of respondents correctly estimated the likelihood of 65-year-olds living to 90. Barely more than one in three accurately guessed the life expectancy of a 65-year-old (84 for men and 87 for women). Just my guess here, but perhaps it’s due to the Centers for Disease Control and Prevention’s (CDC) data that puts the average lifespan in the U.S. at 77. 

These are not just frustrating statistics for advisors to peruse, they are also indicators that American adults have failed to properly ready themselves for the realities of retirement. The study concluded that strong longevity literacy is linked to better retirement preparedness, with more individuals saving regularly and feeling confident about their financial security in retirement when they are armed with the right information.

Using Facts to Tell the Story

There’s good news here, though. Advisors who simply recognize this lack of awareness can take the initiative to talk with clients and go through the numbers and probabilities of longevity risk. Consider this: There are few hard and fast rules and certainties in our business, right? Financial advisors constantly battle gray areas, risk-based outcomes, and squishy behavioral quirks that plague all market participants. But mortality tables don’t lie. They are cold numbers, and they can be used to tell clients a true and compelling story, all in an effort to better their retirement plans.

Removing the Financial Handcuffs

The point is not to scare investors. It’s not to sell them something. It is to help mitigate risks and help relieve future financial anxiety. The truth is that a long-term financial plan is missing something if it is without some form of protection against longevity risk, and annuities can efficiently help close the financial gap. As for the knowledge gap referenced earlier, guaranteed income is something mass-affluent and high-net-worth investors want to learn about. That’s not just my opinion. Research shows that individuals and couples spend more freely during their golden years when they have cash inflows. 

The Psychology Behind Underspending

Compared to those relying solely on retirement savings, clients with income streams alleviate the worries that come with drawing on their principal. A study conducted by David Blanchett and Michael S. Finke explored the spending behavior of retirees with guaranteed income versus non-annuitized wealth.

It was found that retirees tend to underspend from their investments due to both rational and behavioral factors, such as longevity risk and preferences for spending from income rather than assets. The research published in 2021 reveals that retirees with a higher percentage of their wealth in guaranteed income tend to spend more in retirement. 

The Goal? Spend More, Enjoy Life!

Delving a bit deeper into the psychology behind a hesitation to spend, this poor money mindset results in underspending after leaving full-time work. One study found that half of retirees are uncomfortable with the idea of their portfolio decreasing over time, even if it’s for their goals. A reluctance to spend is often rooted in concerns about rising medical expenses and the unpredictability of traditional equity and fixed-income investments. That kind of conservatism with cash is not surprising considering that 61% of Americans, according to a recent survey from Allianz Life, fear running out of money more than they fear death.

Rising Retirement Risks and Worries

Advisors can step in to not only address and educate clients about the perils of longevity risk but also harness that knowledge to improve the quality of their clients’ retirements. At the same time, today’s annuities may include inflation adjustments and include some long-term-care insurance features. There are many variables at play in this “new normal” economy that could result in higher inflation over the coming years and cause insurance providers to rethink their long-term-care insurance offerings. It all makes for increased risk and jitters among the growing number of retirees.

Integrating Social Security Strategy

Along with instructing people about the risk of outliving their assets, there is a natural discussion that should be had about cash-flow planning in retirement. This is another facet of financial planning that can be a major value-add for advisors. We all want people to spend with confidence in their 60s, 70s, and beyond, and the right financial resources can make that happen. Of course, Social Security strategizing goes hand in hand with both longevity-risk management and cash-flow planning in later stages of life. 

Looking Beyond Averages: Probabilities and Protection in Retirement Plans

The TIAA paper sheds even more light on longevity literacy. Someone retiring today at age 67 fails to grasp that there is a reasonable chance she will live another 30 years or more, per the research. Not having a plan that includes a sizable allocation to protective investments and guaranteed income solutions may lead to financial fragility. While the numbers don’t lie, it’s key for advisors and clients alike to look beyond averages, since those data do not always tell the whole story. Probabilities and protection are paramount pieces of a retirement plan.

The Bottom Line

Life expectancy briefly became a story on the evening news as a result of COVID-19’s toll on older Americans. The CDC reported that the 0.9-year drop in life expectancy in 2021 preceded by the 1.8-year decline in 2020 was the biggest two-year decline since 1921 to 1923. 

As life has returned to normal, we can assume people will live longer. Hence, reducing longevity risk is more important than ever. Advisors must educate their clients using statistics and do so in a way that conjures up action. Annuities can help protect against individuals and couples outliving their portfolios and empower them to spend with freedom and confidence as they age.