Expert calls for deeper understanding of longevity risk in financial advising
Purpose Investment has published new insights highlighting the impact of human longevity on retirement planning.
In his analysis, Simon Barcelon, VP, Longevity Retirement Solutions, said longevity is an aspect of investment management that “often escapes rigorous scrutiny,” even as it impacts a significant portion of clients served by financial advisors.
According to Barcelon, some 40% of clients receiving financial advice in Canada are already in the decumulation phase. At the same time, an increasing number of Canadians are expected to retire annually.
Given this demographic trend, Barcelon said it is important that the sector develop a more thorough understanding of longevity risk, so that financial strategies can be tailored to accommodate the varied and increasing lifespans of individuals.
He went on to highlight a recent poll by the University of Pennsylvania’s Pension Research Council which found that having an accurate perception of life expectancy significantly affects individuals’ financial risk tolerance and decision-making confidence.
“This awareness allows for a more balanced approach to retirement planning, avoiding overly conservative or risky financial choices,” said Barcelon. “Research also shows that people feel more at ease about their financial future when they use financial products that match their longevity perceptions.”
The hurdles of limited longevity awareness
One challenge arising from a lack of awareness about longevity is aligning retirement strategies with unpredictable lifespans.
“A recent TIAA study found that only 35% of respondents accurately estimated the lifespan of a 65-year-old,” said Barcelon. “This misjudgement in life expectancy, coupled with the fear of outliving one’s savings, often leads to underspending, causing individuals to leave money on the table.”
Another issue highlighted by Barcelon is how traditional income withdrawal strategies are becoming less relevant as life expectancies rise.
Common approaches like the 4% rule may have been useful in the past, he said, but these rules of thumb could also force retirees into making abrupt financial decisions that are not ideal for their specific situations.
“Such spending adjustments can be quite difficult for clients deep into their retirement,” Barcelon added.
Bridging the longevity gap
To address these challenges, Barcelon pointed to the importance of longevity risk pooling solutions like Purpose Investments’ Longevity Pension Fund.
“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,” he said.
Barcelon also offered the following tips for individuals looking to navigate the complexities of longevity in financial planning:
- Utilize fintech tools that incorporate current longevity data to refine retirement and decumulation strategies.
- Engage in a personalized planning process that is supported by continuous self-education and professional advice.
- Keep up with longevity research, including developments in healthcare, nutrition, and lifestyle.
“As we witness a longevity revolution here in Canada, it's imperative for retirees to stay updated, re-educate, and strategize,” added Barcelon. “Embracing longevity awareness isn't just about reducing risks; it's about improving the quality of life for individuals throughout their retirement.”
What are your thoughts on the importance of longevity awareness in retirement planning? Feel free to share your comments below.
