It was Benjamin Franklin – in a letter to Jean-Baptiste Leroy – who penned “In this world nothing can be said to be certain, except death and taxes!” I do wonder how one treats a topic like this with a financial planning client. For me, it’s part of academic research to manage longevity risk with a process.
Having worked on this for a good number of months, the insights gained are becoming many and varied. We started from the premise that there must be a better way than simply the buffer approach that produces the wrong outcome for the vast majority of retirees. Replacing the static approach for a rebalancing one means the plan morphs – or undergoes a gradual transformation – for the survivors. Using a process puts the emphasis on the best available information, whilst still ensuring that the assets last for the required period.
Next the source of funds model was enhanced. What you get as a part pension depends on how logically the capital is used. It’s critical to have a step down in the planned retirement income upon the first death (say to 70-75%) if one wants to ensure an optimal outcome. A single person on this level of income enjoys the same standard of living.
Much of what is being modelled is to provide comfort to the retiree that a recommended level of income is sustainable and that there is a plan to manage unexpected outcomes of survival – to ensure the money will last. This is truly an area where a planner can show extra value being provided to the client each year – exactly what is needed in the “opt in” environment of post FOFA implementation.
In recent days, I have been researching what typically happens when the first member of a couple passes away after the expected 16 or so years. Under both the buffer approach, and to a lesser extent the rebalancing approach, upon the first death the monies being held for the contingency of that retiree living further years is released. This release of financial resources has (in the examples we have produced) been sufficient to ensure that longevity risk management is virtually not needed from this stage onwards. Standards of living that have become the norm for the couple can be sustained well beyond age 100.
This post retirement risk management area is truly interesting and one where we can be of great service to our clients.
Maths not only rules – but makes the uncontrollable tame!
The NetActuary Team