Low Longevity Awareness in Investment Management

Simon Barcelon and Omer Poroy


13 Feb 2024


The world of investment management thrives on data, projections, and strategizing for the future. Yet, one aspect that often escapes rigorous scrutiny is human longevity and its implications on retirement planning. With approximately 40% of clients served by financial advisors in Canada currently in the decumulation phase, and with more and more Canadians expected to retire each year at an increasing rate, a deep understanding of longevity risk and its implications is increasingly important to ensure that financial strategies are tailored to the expanding and highly variable lifespans of individuals.

Let’s build on that last sentence. As longevity projections evolve, it’s essential to stay informed not only about longevity trends but also about the range of lifetime products available and how they can be integrated into effective retirement strategies. This knowledge is pivotal in ensuring that financial plans are resilient and adaptable.

Recent survey from Pension Research Council – University of Pennsylvania suggests that when individuals have a more accurate perception of their life expectancy, it influences their willingness to take financial risks, and they make more confident decisions about their finances. This awareness allows for a more balanced approach to retirement planning, avoiding overly conservative or risky financial choices. Research also shows that people feel more at ease about their financial future when they use financial products that match their longevity perceptions.

But what exactly do we mean by ' longevity awareness? In the context of financial planning, longevity revolves around accurately estimating an individual’s expected lifespan, as well as understanding the range of possible outcomes (i.e. right tail of the survival distribution). Longevity awareness, therefore, involves a good understanding of the latest research and data on life expectancy, coupled with knowledge of solutions that can help protect their clients finances in the event they live longer than expected.

Common Signs and Subsequent Consequences of Limited Longevity Awareness in Financial Planning

Misaligned Retirement Projections: Retirees face the challenge of aligning retirement strategies with uncertain life spans. A recent TIAA study found that only 35% of respondents accurately estimated the lifespan of a 65-year-old. This misjudgment in life expectancy, coupled with the fear of outliving one’s savings, often leads to underspending, causing individuals to “leave money on the table.”

Oversimplified Withdrawal Approaches: Traditional rules of thumb for withdrawing income in retirement, such as the 4% rule, may have had merit when first developed. Yet, these approaches do not take into consideration the increase in life expectancies. As a result, retirees might find themselves in a situation where they need to make sudden, unplanned financial decisions. Such spending adjustments can be quite difficult for clients deep into their retirement and should be avoided.

This difficulty in predicting life expectancies highlights the role of a solution like the Longevity Pension Fund, which generates sustainable income for life. While variable year to year, it is designed to increase over time, giving investors the confidence to spend to reach their goals.

Actionable Steps: Navigating the Longevity Labyrinth

Combining improved longevity awareness with the strategic use of Longevity Risk Pooling Solutions like the Longevity Pension Fund marks a pivotal shift in retirement planning. As mentioned, significant discrepancies in individuals' life expectancy estimations, coupled with the absence of a solid financial plan to mitigate the variability around life expectancy may lead to excessive retirement savings or the rapid depletion of savings.

The Longevity Pension Fund can help investors overcome the psychological tendency of excessive saving (i.e. underspending) in retirement while providing protection against outliving their assets, irrespective of lifespan variations. There are several steps an individual can take to stand out from the crowd on this topic:

Adopt Advanced Financial Tools: Leverage fintech solutions that incorporate the latest longevity data to refine retirement planning and decumulation strategies.

Collaborate and Customize: Every individual’s situation is unique. Individuals' perceptions of their own longevity vary widely, shaped by their distinctive experiences and viewpoints. Therefore, it's imperative to undertake a journey of self-education and research to refine these perceptions and align them more closely with reality. This informed self-awareness enables the customization of financial planning strategies, ensuring they are not only effective but also deeply resonant with personal aspirations and circumstances. Engaging with knowledgeable financial planners can amplify this process, providing expert insights and guidance.

Embrace Lifelong Learning: Stay up to date on the latest longevity research, including advancements in healthcare, nutrition, and lifestyle factors affecting life expectancy.

The table below illustrates how different Longevity estimations can affect one’s retirement journey

According to a recent study from the Society of Actuaries, more than 50% of retirees miscalculate their own life expectancy by more than 5 years. This significant gap can have a profound impact on a financial plan. The table below illustrates how underestimating and overestimating life expectancy can affect one’s retirement journey without the use of Longevity Risk Pooling Solutions:

Without longevity risk pooling solutions

Final Thoughts

Longevity, when rightly accounted for, can be a true blessing. As we witness a longevity revolution here in Canada, it's imperative for retirees to stay updated, reeducate, and strategize. Embracing longevity awareness isn't just about reducing risks; it's about improving the quality of life for individuals throughout their retirement.

Investors should evaluate their personal circumstances, including, but not limited to, their tax situation, risk tolerance, and retirement goals. They should always speak with their tax professional and investment advisor when it comes to retirement and tax planning. Contact us if to learn more about the Longevity Pension Fund.

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