Many people talk about financial security as a stool that has three legs. All three must be present in order to achieve financial success – protection, accumulation and income.
However, longevity presents its own three-legged stool. I didn’t think about it until I read the 2012 International Monetary Fund (IMG) Global Financial Stability Report. The report dedicated an entire chapter to longevity at three levels – individuals, government and corporate.
I’ve written a lot about longevity in the past, but let’s recap. Life expectancies continue to increase – even as more and more studies show a decrease for the first time in several decades. It’s causing a looming retirement crisis in the United States, largely due to individuals understating their own life expectancy. More people will rely on Social Security as their sole source of income than ever before. Scary. But even more alarming is the impact longevity has on government and corporate plans.
The government’s ability to provide minimal guaranteed income will be pressed by increasing life expectancies. In this study, just a three-year increase in life expectancy will equate to a 50 percent increase in the costs of aging for advanced economies. These new assumptions might prove devastating. In the United States, the Social Security Trust Fund is already close to expected payouts exceeding revenue. As this line is crossed, mitigating longevity risk at the government level might be more challenging than at an individual level.
For corporations, balancing mortality risk in their pensions seems straightforward. Billions of dollars are transferred from corporate pension funds to insurance carriers using Pension Risk Transfer techniques. But with an aging worker population, the report indicated businesses could see as much as a nine percent increase in costs due to longevity. Investors will eventually see these additional costs reflected in stock valuations. And, there is a potential negative impact on valuations due to the unfunded, increasing liabilities associated with longevity and guaranteed incomes.
The three-legged stool holds true for longevity at the government, corporate, and individual levels. You must address the risks of lower Social Security, unfunded pension liabilities and individual shortfalls with your clients. Understanding these risks is necessary to have a complete and meaningful conversation with your clients.
Make sure your client is aware of the choice in government benefits and corporate pension options. These contingencies play an important role in the individual planning process.
Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. His latest book, “Free Throw for Financial Professionals,” is available now – learn more at www.freethrowsforpros.com.
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