Planning for a Long Life Can be Dangerous

good morning everyone and thank you for joining our retirement income Intel for

0:09

August uh can't believe it's the end of August time has flown by we will give

0:14

everyone a couple minutes to join so uh before we get started so we'll just hang

0:20

tight here um and then so everyone hears all the updates and what we have going

0:27

on

0:38

we have quite a few people joining us today this is an uh exciting webinar that Justin will be

0:44

sharing so um we want to make sure everyone has a moment to join and then

0:50

we'll get started um I'll repeat this again in case we have other people join later but if you do have questions

0:58

please pop them in the Q&A um not the chat so questions go in the

1:03

Q&A we will address those at the end of the session today and if you want to

1:09

hear a question answered please like it so it can be upvoted and we if time is limited we

1:17

will address the questions that have the most uh likes um so we'll give everyone

1:23

just another moment and then I'll repeat that as well for those who are just getting uh signed in from the uh waiting

1:31

room um another thing that I will repeat is that this is recorded So if you do

1:37

have to hop off or if uh you missed something and you want to hear it again we will send this out this recording out

1:44

it will also be on our website and we'll share it on social so if you miss any

1:51

key nuggets that you want to go back and listen to uh we will have it uh available for

1:57

you and I did notice Taylor at least in my version of Zoom since it last updated

2:03

the Q&A at least for me is in the more menu it used to be right front and center which I I find really annoying

2:09

that they moved it so if there's anybody from Zoom here put it back next to

2:15

chat but uh yeah if you're looking for the Q&A it's possible it's in the triple dot

2:21

with a circle around it um menu yeah for one of our attendees

2:29

you can move it around um so we got some tech on Tech learning today you can drag

2:35

it and so Zoom talk Thursday Tuesday

2:41

Zoom training slash uh income lab

2:46

information um so thank you for the person that popped that into to the

2:52

Q&A you can drag and drop all of those icons down there make it exactly how you

2:58

want it it it does work so I already tested it great job shout out to

3:06

Laura okay so we will go ahead and get started we are four minutes past the hour uh as a reminder please pop your

3:14

questions in the Q&A if you have uh questions when they would you would like

3:19

them to get addressed please put them in the Q&A versus the chat uh if you want to hear the question answered please

3:26

upvote it as we might run out of time at the end um and we want to make sure those are addressed um also this is

3:34

recorded So if you want to have any takeaways or if you want to listen to it again uh please know that we will send

3:41

it out to you via recording um Justin any other updates or uh upcoming

3:48

events no that's it I'd say Let's uh let's get going right all right so this

3:55

uh this presentation planning for a long life can be dangerous uh is based on an

4:02

article that I just published on the the kitus blog um kits.com the Nerds I've

4:08

view so um we can drop that in the in the chat if you're interested in more um

4:14

thought this was a much better title than you know fun with Actuarial tables but uh and we'll try to keep this

4:20

presentation as fun as the title is um but it's really about

4:25

um it's about one of the these key factors in Financial Planning in general

4:31

but we're going to focus on retirement planning because you know we're income lab and and and we love retirement income planning um which is how do I

4:40

deal with the fact that I don't actually know how long my clients are going to live and what are the risks around that

4:48

so we talk a lot about you know in uh in investment risk right will I have good

4:54

returns or bad returns sequence of those returns um we've talked in the past and I've written about inflation risk which

5:01

I think is underappreciated in financial planning and in financial planning software we talked on one of these

5:08

webinars in the past and I've also written on kitus about how if you have software that doesn't have a standard

5:14

deviation for inflation then you are essentially not considering inflation to be a risk um but there's a third piece

5:23

and it's kind of these are the three main uh risks in retirement investment

5:28

risk inflation risk and mortality and Longevity risk so

5:33

longevity risk and mortality risk are two sides of the same coin longevity risk is the risk that you live longer

5:41

than you'd expected or that you assumed and because of that you end up having to

5:46

stretch your resources over a longer period of time than you thought and that overstresses your

5:53

resources I think people are pretty aware of this one this is one that that is talked about frequently and I think

5:59

the reason is as financial advisers we often are focused on the portfolio side

6:04

of the equation which makes sense that's a side where we there are a lot of uh a lot of adjustments we can make there but

6:12

the other side of it is mortality risk which is the risk that one person in a couple so this only applies to couples

6:19

um dies sooner than expected and because of that there's a reduction in

6:26

resources and typically here we're talking about non portfolio resources so Social Security and pensions although in

6:32

theory it could be portfolio resources if for example there's some kind of a um estate planning situation where money

6:39

you know needs is is going to go directly to to somebody else when that person dies typically that's not what

6:44

happens though typically it would go to a a trust for the surviving spouse and then to those people um but regardless

6:51

somebody dies there's a reduction in resources and the so the surviving spouse finds themselves with less than

6:58

they'd expected and so again they're overstressing their resources to try to

7:03

fund their lifestyle so one is living too long one is not living long enough

7:08

and both are bad as I just said longevity risk it it

7:14

tends to be the one that advisers focus on because it revolves around how much we're spending from the portfolio so if

7:21

you're planning for a really short plan you know 10 years I can spend a lot more for my portfolio than if I'm planning

7:27

for a longer plan a 30-year plan a 40 year plan that's pretty intuitive you almost don't even need to do the math

7:32

right you're just how thinly am I spreading this portfolio across the um

7:38

across the the the lifetime if it's a short lifetime it could be pretty thick um and so that also means that when it

7:45

comes to longevity risk this you could you could call this the question of but what if I live too long right but what

7:52

if I live a really long time am I still going to have money right that's the you kind of put yourself in the mindset of that anxiety the typical solution is

7:59

just plan for a longer life now probably if you plan to 90 95 100 probably the

8:06

person will live that long but if they do then you'll have planned for it and so you'll have spread the uh the

8:13

resources out over that period the cost of doing that is well they probably underspent

8:19

early but I think people look at that and they often say well the the you know the cost to spend a little less now in

8:27

case I live longer is better than the cost of spending more now and then not having enough later um so so I think

8:32

this is one that a lot of advisers have thought about and um and the typical solution is just a plan for a long life

8:38

longer life than people actually typically have mortality risk on the other hand as

8:44

I said except for in maybe some some uh edge cases it usually revolves around non-portfolio income so this is the key

8:52

to this this presentation is it's about looking at all of the household resources not just the portfolio we need

8:59

to expand our aperture to look at not just the portfolio but non-portfolio resources like Social Security and

9:06

pensions and it's not uncommon at all for these

9:11

resources to change when one person in a couple dies um Social Security uh is

9:18

designed this way if there's if both people are getting Social Security when one dies the total amount of Social

9:24

Security received will change and it will go down pensions a lot of people choose single life pension

9:30

this is very very common um because this isn't really something that people talk about all

9:36

that much I I have not found sort of a typical solution um you might think oh the typical solution would be planned

9:42

for a short life um but of course what we're going to end up trying to do is

9:47

plan to handle both of these risks it's they they both exist we don't want to you know plan for one and not the other

9:54

um and in fact planning for a long life exacerbates this risk so if you put in

9:59

plan that um you know one person will live to you know 95 you are saying that their Social

10:07

Security will last till 95 well if they die earlier than that you're going to end up in a position where you

10:14

overstated the resources available to that surviving spouse um because you

10:20

were assuming that extra Social Security is there until that person is age 95 um kind of whether they're alive or not um

10:27

and and that will lead you to to um overstate what someone can spend to

10:33

understate the risk and so on so um let's look an

10:38

example so let's say we have John and Mary both age 65 um and these are their

10:44

resources pretty basic um they both have social security and John has a single life

10:52

pension and then they have a million dollar portfolio the issue here is that if if

10:59

John Dies they're going to lose $2,000 of their social security so essentially

11:06

Mary is going to have a Survivor benefit that you know it just the the long and

11:13

the short of it is she she'll take over John basically um so she'll have 3,000

11:18

John's single life pension is gone and you know we don't know exactly what the portfolio will be when this happens

11:24

right um but we've lost $3,500 in monthly income non-portfolio

11:33

income and so while Mary's spending needs may be lower after John Dies um

11:40

unless they are $3,500 lower which is unlikely um there's a problem here right

11:47

so if we plan for both of them to live 30 years which puts both at 95 which is

11:53

a ripe old age unlikely they're going to get there but not uncommon um in fact

11:58

it's a we think it's a default in a lot of um financial planning software we think the

12:04

defaults tend to be either 90 or 95 the reason we think that is um David Blanchett published an article a couple

12:10

years ago now where he looked at um thousands of financial plans that he had

12:16

access to um I think it was when he was at Morning Star so I'm assuming it was sort of anonymized data that he had

12:22

through them and he found that 90% of those plans planned for people to live to either 90 or 95

12:29

um which strikes me as that that smells like a default to me right it's it's

12:34

possible that everyone came up with that number just looking for a round number that sounded old that's that's the other

12:40

possibility I suspect it's a default um but in any case if we plann to the

12:45

longer of those two um and we were targeting a pretty conservative 10%

12:52

chance of overspending 90% chance of underspending and for those of you who are curious

12:58

about that um terminology this is uh this is kind of

13:04

the the better way to think about balancing risk in retirement how much can I spend that answering that question

13:10

how much can I spend we're looking to balance these two risks in retirement one the risk of overspending I don't

13:16

want to run out of money the other the risk of underspending I don't want to so underspend that I'm giving up a a

13:22

fruitful and fulfilling life right like hey let me spend what I'm eligible for so if we're targeting a pretty

13:28

conservative end to that scale um then they would be able to spend $9,800 a

13:35

month with these resources at age 65 um and that's what their plan would be their plan would be to continue to do

13:43

that um however if John Dies at age 75

13:48

10 years into the plan in retrospect we would look back and say ah actually it wasn't a 10% risk

13:55

of overspending and a 90% risk of underspending it was quite almost the

14:01

reverse it was 58% chance of overspending so more likely that you're overspending than underp spending in

14:07

other words that was not spending within their means right anything you know

14:14

where the left side is below 50% is spending within your means which is what we tend to want to do it's what we want

14:19

to do in our working years we want to spend less than we make basically um the problem is in retirement we don't know

14:25

what we quote unquote make and so we're always kind of uh estimating how much it is we can afford to spend and you can

14:31

see this gives you a really good example of when John Dies will have a huge

14:37

effect on what this couple can actually afford what they're eligible for and

14:42

because we simplistically assumed John would have this really long life maybe

14:47

we thought that that was doing us a favor by handling longevity risk um we

14:53

actually could be massively overstating what someone could spend or another way

14:59

to think about it is massively understating the risk of that uh of that spending

15:06

level so we can see we're in a conundrum here for longevity risk if we have a

15:12

long plan assume somebody lives a long time we are spreading the portfolio out

15:17

and so we're being conservative we're being you know safer in the sense of we're not going to overstress the

15:22

resources um it certainly could end up that we were underst stressing them and so we end up in in the opposite risk

15:29

which is the the risk of regret someone lives uh you know they find themselves at 80 and uh you know not assuming

15:36

they're going to live to 95 and thinking to themselves geez I wish I would have spent more right so there's always that risk if I plan for a longer life but in

15:43

terms of portfolio longevity it's quote unquote safer unfortunately if I plan for

15:49

someone to live a long time I'm going to plan for their non-portfolio income to continue through that Lifetime and I'm

15:57

going to make it riskier because if that doesn't happened um then that portfolio

16:02

income is going to drop away now I have to make that up or at least make a portion of that up with the portfolio I

16:07

was never planning to do that to begin with and so now I'm overstressing the portfolio so this kind of feels like a

16:14

um yeah a dilemma right there's no there's no straightforward way if I do one thing I make the other thing

16:22

worse um before we get into some more details on this and and and how to fix

16:29

this problem without giving up on either risk I wanted to just do an aside on what risk even means in in retirement

16:38

planning and this is a good way to think about um whenever we're doing

16:44

planning um we need to understand when our assumptions when the factors that we

16:49

involve in the planning are two things variable and uncertain meaning yeah we're going to make assumptions about it

16:55

and so on but we do not know ahead of time what it truly will be what your real experience will be so any risk in

17:02

retirement is going to be variable and uncertain and it'll have to have a

17:08

material positive or negative Financial effect on you right so there are lots of things that are variable uncertain the

17:13

weather things like that but you know I'm I'm interested in the ones that actually have an effect on my financial

17:19

life how much can I spend that kind of thing right and I already said there are three main ones that I think we focus on

17:27

there are a few others but um investment returns which people call sequence of returns risk inflation which

17:34

we call sequence of inflation risk I think this is as I said underappreciated um at income lab we we

17:41

handle this I'm not aware of other software that does may exist but I I know a lot of software does not um and

17:47

what we're talking about today which is longevity and mortality so we don't really know when someone will die we

17:53

just don't um and whenever we State a specific date of death we are

17:59

essentially saying this is not a risk this is going to happen in at this point and so we've we've another way to put it

18:05

is anytime you do that anytime you put a fixed amount instead of a modeling the

18:12

world as variable and uncertain you're saying hey this is what my assumption is going to be if it turns out different

18:17

than that we will just accept the risk we will just absorb whatever happens

18:23

that's that's the effect of it um so when we think about risk management you can um you know manage risk you can

18:29

transfer risk um or you can just accept the risk and so essentially if you're

18:35

you're not doing um you know more sophisticated longevity and mortality

18:40

planning that's what you're doing you're just saying hey whatever happens I get it could mean things are bad we'll just accept it when that happens same with

18:47

inflation if you're saying hey I inflation is 2 and a half% if it turns out to be 8% well we'll just we'll just

18:53

eat the effects of that right well longevity clear is variable

18:59

and uncertain uh I doubt I actually needed to to convince you of that but um we'll introduce some figures here to

19:07

kind of you know get the get the engine warmed up to look at what longevity and mortality really

19:14

look like so this is a surv a set of survivorship Curves where we have um over on the left

19:22

we have a male and female age 65 and then as time goes on from age 65 forward

19:28

of that population of people um not all of them continue to be

19:34

alive right and so as you go as you go along the blue and red are showing of

19:39

That population of 65y old males how many are still alive of that population of 65y old females how many are still

19:45

alive and then the green is showing if we had two a male and a female um in

19:52

what in that population in how many of those pairs is one is one still alive so this is sort of like looking at a couple

19:59

a household saying hey what's the survivorship of at least one person in the couple and you can see how it goes

20:05

down over time another way to look at this is um

20:10

if you have a couple what are the chances as time goes on that that couple is both of them

20:16

alive the man as a widower or the woman as a as a widow right and so you can see

20:22

as time goes on the chances that they're both alive is coming down and the chances that only one of them is left is

20:28

is is going up um the reason I went over those is

20:34

we're going to use these which are based on um mortality tables Actuarial science

20:41

to let an advisor incorporate mortality risk into their plan without having to

20:48

give up on their favorite um solution to longevity risk which is planning for a

20:54

long life okay there is another way someone could handle mortality and

21:00

Longevity risk but it's not one that I've found clients or advisers really

21:05

like all that much and it's using randomized mortality so instead of

21:11

planning for a you know um having a plan that is of a fixed

21:17

length you would randomize whether people make it to the end so kind of like in aani Carlos scenario you might

21:24

randomize your returns or randomize your inflation you could randomize whether someone dies and that is a cool thing to

21:30

do academically it's a it's the kind of thing that um like Bill Sharp talks about in his book on um retirement

21:38

income planning it doesn't tend to be the kind of thing that that resonates very well with with advisers or clients

21:45

um because you would essentially be saying to them ah you know look yeah maybe things could get bad in you know

21:52

after 20 years but hey you might be dead by then so no big deal right that's just not the narrative that really you know

22:00

uh builds trust and confidence in people they want to know that no I have a plan for you to live this long and in fact if

22:08

you live longer I have a plan for that too right they want to know you have a plan for it and the plan is not well you might be dead um so that's why we don't

22:16

approach the problem that way um although what we do is is related to the

22:23

idea that we're we're taking into account the fact that people you know are we're not going to assume that you

22:28

definitely will live throughout your entire plan that's really where mortality risk um comes from is the

22:34

assumption that people definitely will live throughout their entire plan so what do we do

22:40

instead the main thing we do in income lab is we say um when you're accounting

22:45

for all the resources that someone can can bring to retirement we don't want to assume that

22:53

the non-portfolio resources will be there throughout the entire plan in other words we don't want to give you

22:58

credit for all of those non-portfolio resources throughout the entire plan if we did in this scenario John and Mary's

23:07

uh social security benefit would look like this we would just be saying yep John's got 3,000 Mary's got 2,000 5,000

23:14

the whole time great this is the source of mortality risk right because if if

23:19

John or Mary dies that you know the red here essentially is going to go away and

23:25

that's going to rip $2,000 out of this plan um unexpectedly

23:32

um so what we do is we

23:38

adjust income streams for the chances that the person is still

23:43

alive so let's take Social Security at the beginning of the plan

23:48

highly likely that they're both still alive and so it's all based on them both

23:54

being alive and you got $5,000 But as time goes on month by month we know in the future there is a

24:00

chance that one or the other will now be a Survivor getting a survivor's benefit

24:06

um and and so the total that we're quote unquote giving them credit for in the

24:12

background of the plan looks like this so we're kind of just it's slowly uh attenuating as time goes on

24:20

you could think of this as kind of a you know randomizing of when somebody dies

24:26

um but what we're not doing is a assuming that they both might be dead at any point in time okay so this is sort

24:32

of like the average amount that they would receive if they could live their

24:38

life you know a thousand times um and at least one of them lives to the end that's another way to think about this

24:45

um and by doing that we're not giving them full credit but we're also not you know specifying hey let's you know put

24:52

John's date of death at 70 or 75 cuz I mean there's also a chance that he will live uh longer than that in fact as we

24:59

saw the the the averages are are beyond that for a for even just for a single

25:04

male um so what this does is kind of balances uh what we know about

25:12

mortality um with the desire to give them you know really good advice we

25:17

don't want to give them advice that to to underspend we don't want to give them advice to overspend for the pension which was

25:24

single life it's a lot simpler it's just based on the chances that John is still alive and so this is what we quote

25:30

unquote give the plan credit for over over the life of the

25:36

plan so what does that do um now these are the plan resources but

25:43

you have to in your head understand in the background we're doing mortality adjustments on on all of on the Social

25:50

Security and the pension so with the mortality adjustments it trims $1,100 a

25:55

month from their uh from their spending goes from $9,800 a month to $8,700 a

26:03

month what this does is it it says what's the amount I should advise

26:10

John and Mary to spend so that if one of them dies um the the impact on the surviving

26:18

spouse is not overly high and in fact um on average the impact will be nothing at

26:23

all they'll be able to continue their spending uh at the same level

26:28

right so this fully mortality adjusts the uh the

26:33

plan the fact is you might not always want to do that there may be a situation

26:39

where you actually can accept a certain amount of mortality risk or another way to look at it is um maybe when johnon or

26:48

Mary dies their spending needs will go down and so losing a little bit of their spending capacity would be fine um you

26:55

can do that in income lab as well um the the way that you would do it is we you can do mortality adjustments on income

27:02

so Social Security is done for you automatically but anytime you make a pension for example and you say um Yep

27:09

this changes if somebody dies if if John dies it goes to zero you're essentially saying it's single life John's single

27:14

life pension right um You can also do that with expenses

27:20

you could say hey here's $1,000 um if if John dies it goes to

27:26

zero okay now you're saying all right there's sort of this extra thousand that

27:31

goes away if JN dies meaning Mary will spend less if John is dead and so now your plan is mortality adjusted not just

27:38

for income but for expenses as well and the plan the you know this this spending

27:43

amount 8700 um if you did that it would be higher than 8700 it would be saying

27:50

hey you don't have to take this full $100 reduction to handle mortality

27:55

because you're going to accept some of the reduction spending so you know it might be 9,000 or 9100 or something like

28:02

that so it would be in between if you said hey yeah our spending needs will go down so there are a lot of other kind of

28:09

tricks to to uh to include mortality adjustment in a plan but that's the most basic straightforward one so what we're

28:16

suggesting is to plan for mortality justed income you model all the plan resources and parameters and so on for

28:23

the income and expenses that will change when someone dies make sure those are mortality adjusted and then you're

28:30

producing a spending capacity that takes mortality risk into account kind of on average you're going to be able to to

28:37

give um the the spending experience that people want even if somebody

28:45

dies okay so that's the mortality risk side of things um which is planning for

28:51

non-portfolio income not to necessarily make it all the way through the plan and there was a quote in the kit article

28:58

that I think they may have pulled it out they they really liked it was basically to plan for mortality risk we can't

29:04

assume that all of the income in the plan will last as long as the plan right

29:10

we kind of are trying to separate out how long we're planning for versus how long we're planning for the income to

29:17

last which is it's just it's a it's an analysis approach right we don't

29:23

necessarily talk to clients in that way so for clients for example you might be

29:28

better off showing them this chart saying hey if you both make it to the end of the plan here's what Social

29:34

Security looks like right that's not confusing to People by the way this is adjusted this does not include inflation

29:41

adjustments they would be going up if they had inflation adjustments in it so this is in today's

29:46

dollars so if you did that you could say all right we have a 30-year plan um this

29:54

is what it would look like if you both made it there but let's be honest um you you might not both live 30 years and if

30:01

we assumed you definitely were going to live 30 years we would be doing you a disservice because we would probably be

30:07

overstating how spend we would be understating your risk we want to get

30:13

that right and so don't worry we actually have included in our

30:19

analysis some assumptions about what would happen if one of you dies what

30:24

would happen to your portfolio income what would happen to your non-portfolio income rather and and so our advice to

30:32

you takes that into account and you may just leave it at that right for most people this chart is

30:38

not going to be helpful you know I suppose for some it it might but typically just talking through the fact

30:44

that you are aware of mortality risk you don't want to you know serve them wrong

30:50

by assuming that they definitely will live the entire plan because that could hurt the surviving spouse um in that

30:56

article I also mentioned I mean this this particularly became Salient to me because my my dad asked me that question

31:01

he said well what would happen to Mom if I die so for him that was actually the primary thing he was asking about rather

31:08

than well what if I live too long it was well what if I what if I die right

31:13

so the nice thing about planning with mortality risk in mind is you can address that that really is a

31:19

Salient um fear and when you're planning for couples for a lot of couples it's going to be well what happens if I die

31:25

are they going to be okay right am I leaving them with enough so you can address that and say yes we

31:30

we're we're taking that into account don't worry I get it this has you living to 95 I get it no no one in your

31:36

family's ever lived that long don't worry we've we're taking care of that on on the back end to make sure that you

31:43

are not

31:48

overspending all right so let's look at planning for longevity risk

31:54

um as I mentioned before we Blanchet found people you know 90% of people in

31:59

his study were planning to age 90 or 95 that's either just a round number that we all happen to agree on or those are

32:05

plan defaults and some kind of software um but really plan length should depend

32:13

on the clients it should depend on who they are it should depend on whether you're doing planning for a single

32:20

client or a joint couple it should depend on sex age um

32:28

Health right I mean people have opinions about how long lived they think they'll be based on their own health their own

32:35

their family experience and so on people expect there to be differences in this so when we just deliver sort of round

32:42

number defaults I think we're not doing what people think we're doing um just as

32:48

a uh as an aside uh kind of socioeconomic status matters quite a bit too so you will see

32:55

lots of different um life expectancy numbers out there just keep in mind that

33:02

there are big differences depending on this is based on uh income uh which I think is a decent

33:08

proxy for wealth right so probably the people who have financial advisors um

33:14

are a little more to the right here they're probably quintile three four and five so the you know the upper 60% maybe

33:20

the upper 40 or 20% and you can see um how as we go from the left to the right

33:26

here if you have more income you tend to have a longer life this happens to be a

33:32

life expectancy from age 50 so essentially you can just add 50 to these numbers um and you can see as time has

33:39

gone on so on so the 1960 cohort the people who are um 64 years old um are

33:46

much more long lived than those who were born in uh in 1930 and were 50 in in

33:52

1980 um but you can see the the huge gap in uh in life expectancy um for us at

33:59

income lab that is why we use um mortality tables based on retirement

34:05

plan participants so those are people who have retirement plans 401ks um so that basically picks out you know a

34:12

slightly longer lived uh crowd um here's just another so this is

34:18

uh survival to age 85 from age 50 um and you can see how um you know the the

34:26

middle of the of the road um for males

34:31

50% of people are getting there whereas for the the highest 20% of income earners 66% of males are getting there

34:39

um it's uh it's actually kind of interesting that it's like a little

34:44

lopsided for females there are a lot more really longlived um people uh in the uh in the highest

34:53

income uh group for for females

34:58

okay so putting that aside that the the the the takeaway from that by the way is

35:04

it's important to to be using statistics that you think reflect um the people you're serving right so if you used IRS

35:10

or Social Security mortality tables that's the whole population it's going to be shorter you're going to have

35:17

you're have higher mortality assumptions lower longevity assumptions if you if you use those statistics we use um uh

35:25

statistics that push lives a little longer at income lab because we think that's more reflective of the kind of

35:32

person who is served by a financial advisor who uses income lab okay so what's that look like well

35:40

you can just use uh Actuarial tables mortality tables

35:45

to produce plan lengths um there's no reason to you know gas you know put your

35:51

finger in the air or use plan defaults if you want to deliver customized plan

35:57

length based on age sex health and so on all you need

36:04

to do is say okay for either a person this of this sort or a um or a couple

36:12

what what does actal science tell me is a is a reasonable plan length so for example for in this

36:18

case this may be true I I have male 65 female 63 but uh I know we were talking

36:25

65 65 earlier let's go with um if I were sort of saying all

36:31

right um how long do I want to plan for at least one of these people to live

36:36

right in the middle is 30 years from there I can say well what are their feelings what's their health

36:44

impact um so they may maybe they both are smokers or they you know they may

36:49

have things that that push us left on this curve and I want to plan for a much shorter lifetime or they might you know

36:57

exercise a lot and have a lot of longevity in their family and I want to push things toward a longer lifetime but at least now I started with a range of

37:05

reasonable plan lengths I wasn't pulling it out of the air and now I can choose from them right I kind of move this this

37:11

slider of risk and I think about it as longevity expectations or you know the percent of your peers that you'll

37:18

outlive um a little bit more crudely you know how many of your friends funerals

37:25

will you go to right 50 50% 60% 70% um so this is just where am I going to land

37:32

on this and this is a little bit again we don't actually know this right but we can trust people's reports about uh

37:39

family history uh health and so on and and this will kind of give us good book ends here you can see even on the far

37:45

left 10% um we're at a 20-year plan maybe a little bit less than a 20-year plan

37:51

right um you'll find this in income lab in the longevity settings

37:58

it is possible in income lab to to state an actual date of death for one of these um one of these uh clients uh you would

38:07

typically do that if there's you know kind of a special situation like a you

38:12

know a terminal diagnosis or or just a real um lopsidedness in the expectations

38:20

um if you do state a date of death for one of these people we will still apply

38:25

the mortality adjustments up to that date and then from that date on we'll just give them zero like no chance they're still alive from then on so

38:31

you're you're not giving up on this mortality adjustments by using a specified date of death if you're not

38:37

using a specified date of death then you use this slider to kind of say hey am I

38:43

planning to be much longer than average or you know people of my age and sex um

38:49

much below average you know our our default is in the middle here is actually slightly above average so it's

38:55

at the 60% um longevity level um but you can see here I moved them down almost

39:01

all the way to the right I moved both of them you can Mi them as well um and now we're living longer than 35% of people

39:07

our age meaning one of us will last longer than 35% of couples uh our ages

39:14

um and now instead of almost 30 years I'm at 25 years right so you just you get the plan length automatically by

39:21

kind of answering this question um based on your health and family history what longevity level do you think you'd like

39:26

to include in this plan crucially it's not a set it and forget

39:35

it thing though right so we don't get a plan length and then as time goes on just leave it the same um of course

39:43

we're not leaving it the same in the sense that it doesn't continue to be 30 years but also we're not just subtracting one every time a year goes

39:50

on because um as people survive they're life expectancy gets

39:58

pushed out further into the future because they have survived they didn't die they weren't among that group that

40:03

died and so now the new cohort has a little bit longer expectation of life

40:10

than they had you know a year ago for example at income lab we do this automatically for you so if you have a

40:17

plan that is uh that is implemented um every time we update it

40:23

monthly we are recalculating the plan length we're saying all right you wanted

40:29

for example you know 60% uh longevity expectation so you're

40:34

going to outlive 60% of people like you given your current age and that you you know you just lived

40:40

another year what where's that put you right so now um as a year goes on I'm not going to be it was 29.8 it's not

40:47

going to be 28.8 it might only be slightly extended it might be you know 29 right so we only

40:55

lost a little bit less than a year for example and you can see that in this updated longevity curve here the blue

41:01

line it's kind of flattening out it's a it's not as steep as if I just

41:07

subtracted a year every time I survived a year that point it looks subtle but it's

41:14

really powerful and it means that um that initial plan length is not as

41:23

important as it feels right when we are at this how long should I plan for this plan to be we feel like we can't get it

41:29

wrong and specifically we can't be wrong on the short side cuz I don't want to catch up to that and then have been

41:34

wrong and now what am I going to do the fact is you'll never catch up if you do

41:41

longevity planning this way if your plan length is always getting updated it's always getting pushed out further and further into the future and in fact at

41:48

income lab we'll never let a plan be less than 5 years which just kind of a floor that we have just to make sure

41:54

that um you're never your plan never says yeah spend all your money because you're going to die tomorrow that's

42:00

that's that's that doesn't happen um and if it does it's not typically uh

42:06

possible to to go and spend all your money um so this what this does I know

42:11

it's it's hard to kind of internalize this emotionally but it really means as time goes on you're getting to make new

42:18

bets on how long someone's going to live it's like getting to update your wager at a basketball game you know after one

42:25

quarter after two quarters after three quarters you're gonna you're gonna zero in on the right answer um it you it is

42:33

not you do not just get one chance and the effect of that when you're also

42:38

updating how much can I spend and guard rails and so on is really to remove a

42:44

lot of the risk from that initial plan length um assumption at the

42:50

beginning it's also great to do this um because part of if you're a cfp if

42:55

you're providing Financial planning part of this is Step seven monitoring progress and updating so having a system

43:02

for updating plan length is a crucial part of this it's just a fact that if

43:08

you you know retired at 65 and had an assumption about your Longevity if you make it to 75 you should have updated it

43:15

because the fact that you just lived 10 years is is information you didn't have at the beginning so you need just like

43:21

you wouldn't uh fail to look at someone's new portfolio balance 10 years in you wouldn't fail to look at their

43:27

new longevity expectations so having this as a demonstrable documented proog process is crucial for complete

43:34

financial planning um the fact that this works you

43:39

can see in our software a great place to look at it is uh the retirement stress test so you this the retirement Stress

43:47

Test shows you what a plan would have done if it had been followed exactly as

43:53

written and part of every plan and income lab is uh plan length updates so

43:59

what you're seeing here as a plan starting in 2007 getting through today it's not shown in here what the

44:06

plan length is at each point but the plan length is getting pushed out uh past it where it was originally as this

44:12

time goes on and that's why it's part part of why it can deliver um good

44:17

advice on how much someone can spend so essentially every plan and income lab has this blue um kind of uh you know

44:26

shallow line going on it if you wanted to if you got new information about um

44:32

longevity for example a health diagnosis you can always reconcile a plan by

44:38

changing the longevity expectations and that will actually change the guard rails and maybe give you a pay cut or a

44:44

pay race um typically what you learn is you know bad news there so probably more like a pay race um so by using income

44:52

lab you get the mortality adjustment so you can handle mortality risk but you also get a really great way to do

44:59

longevity risk planning um by um using this kind of updated plan length

45:06

methodology so that's uh that's all for today there is more in the article as I mentioned um at kiss.com um and maybe I

45:14

can uh can drop that in the in the chat here unless somebody already

45:19

did actually that perfect okay so we do have have quite a

45:27

few questions um I feel like we could spend another hour on questions but I've

45:33

asked everyone to up vote them so if please if you have want to hear a question answered that's listed please

45:40

like it um and as a reminder put the questions in the Q&A uh not in the chat

45:46

so um let's start with one that has eight votes we have a couple with eight

45:51

votes uh let's see okay uh oh we have a 10 found one okay how does income lab

45:58

balance these two risks When de developing a spending

46:03

capacity so we don't shorten a plan

46:08

right so that's our solution to mortality risk is not shortening a plan because then you would just increase longevity risk so we'll still we have

46:16

the same plan length um but we will apply mortality adjustments to the

46:22

income sources that are um you could think of it a couple different different ways you can think of them as like

46:28

mortality sensitive or the the kinds of income that require both people be alive

46:33

that kind of thing and so even if you have a really long plan eventually like in John's pension there eventually at at

46:41

age you know a 100 the amount of mortality adjusted income we're giving the plan from John's single life pension

46:47

is Tiny it so yes we're probably still slightly overstating it but there's a

46:52

chance John will still be alive at a 100 it's just going to be of that $1,500 maybe there's like you know 100 bucks

46:58

left or something like that um so that's how we balance those risks um you can if

47:03

you want though you know if if you say you're still able to say hey I don't

47:09

want to plan for extreme longevity that was what we just went over at the end like go ahead and be more middle of the

47:14

road or even you can plan for less than average Longevity if you think that's

47:21

appropriate okay you may get into this later in the presentation but how do you view annuities to deal with these risks

47:28

and what about the concept of pension maximization take single life pension

47:33

but also buy life insurance parentheses with difference in pension payouts as the premium to provide dollars to

47:40

surviving spouse if they pass too early yeah both really good questions um

47:46

you can put uh lifetime annuities in a plan and test than making a plan that's

47:53

really long because uh other other than inflation which will have an impact on most annuities um the annuity will

48:00

continue paying right whereas the portfolio will have to be spread thinner so you you may see more of an effect in

48:07

if you make a plan that's really long to say hey let's kind of stress test this plan what's it look like does the annuity help us if we plan for a really

48:14

long life I've actually seen it also help even if it's kind of an average lifetime so you don't necessarily have

48:19

to do that but that's that is a good uh a good thing to do for pension

48:24

maximization um you can definitely build a plan that way as well you typically do need to kind of

48:31

put a date of death for one person and then you can test it so it's only with a date of death that we will include a

48:37

death benefit in a plan from life insurance if you don't we don't kind of give you like an average uh death

48:45

benefit otherwise so that that's how I would do that I would put a date of death for one per the person with the

48:50

pension and then you know have that hit the portfolio or buy an annuity with it

48:55

for the surviving spouse something like that in the plan how does income lab summarize all

49:01

plans parentheses spouse one mortality spouse two mortality spouse one longevity spouse two longevity into a

49:07

summary for clients to be able to make decisions and help advisers make best practice

49:13

decisions um I think I'd have to understand the

49:18

question a little bit better like it out could I see you know survivorship

49:25

curves or something something helping people sort of understand hey someone your age you know how how long might

49:31

they live um if that's if that's the request we don't we don't have a view for that we have um if it's something

49:38

that advisers think would be really useful it definitely could do that um we've tended to try to avoid complex uh

49:47

statistical views because uh it can just really uh drive down a rabbit hole but

49:53

if there is something that people would find useful we'd be happy to to look at adding a feature like

49:59

that okay how do you like to think about the impact on tax brackets when one of the

50:06

couple dies yeah I didn't mention but I did see somebody mentioned in the in the Q&A

50:12

that when someone dies uh not every not all expenses go down um and taxes are

50:18

are one of them that would typically go up um it depends on the situation very much

50:24

though right I mean you know if one spouse is a lot Young and they inherit the IRA maybe they used to have rmds now

50:29

they don't because they're young so it can really depend on the situation but you're right I mean it's we should not

50:34

just assume that all expenses go down when one person dies they might even go up there could be extra expenses

50:41

unrelated to taxes that that come into play so it's really worth doing kind of a

50:46

customized um look at what you think might happen to expenses when someone dies if you want to look at the shift

50:53

from joint to single tax brackets you can do that in income lab just by stating a date of death and then in the

50:59

tax analysis we'll flip to single tax brackets are you able to see actual

51:06

example are we able to to see actual examples of what Justin is talking about through out this through in the software

51:14

itself um is it is easier to understand when he walks through what we are all using with

51:20

clients um again we don't have a you know a way to sort of look at actu

51:27

uh tables and things like that but um you can see the effect of these things

51:33

pretty easily I'm going to create a really quick um plan here for you and

51:39

I'll show you how that works

51:46

um so for example I'm just going to create a a

51:51

pension

52:01

share my

52:13

screen okay so this plan just has um a

52:18

pension $2,000 it's joint life and it's adjusted for inflation I've never even

52:23

seen one like that but maybe they exist somewhere um if

52:29

I look at the spending capacity I'm at

52:41

5160 and now I'm going to change that pension to be single life on John's

52:52

life you might share where you're navigating oh yes okay so I went to there's a couple places you could do

52:58

this I went to the um to the uh little pencil icon and then

53:04

I went to income other income this is the pension the gear icon and I just

53:10

changed it to be owned by John it it actually and then I I made sure actually I think automatically it'll do that

53:16

there's also in um in life Hub you can do the exact same thing if you just click on the penchion you'll see that

53:22

side panel open and make the same changes so just by changing it from single life to

53:27

Joint um I'm now at uh 4620 whereas when I

53:35

had uh a joint pension I was at you know 5160 so um I lost some of my spending

53:42

capacity because of mortality risk so 500 bucks or

53:47

so okay will there be an option to set spousal retirement plans to convert into

53:54

inherited IRAs upon death instead of of cashing them out into a taxable account for the surviving

54:00

spouse so they should actually automatically be going to a spousal roll over Ira if you have a plan where that's

54:06

not happening let our team know um and we'll see why that's happening in that

54:11

particular plan it should not be um also same kind of question with life

54:18

insurance death benefits being taxed is there a is there a timeline to address

54:25

the issue of Life Insurance if it's being taxed to the surviving spouse they those should be taxfree I

54:30

think I'm not sure who was asking the question there was a plan that I saw recently come through our service center

54:37

that actually was it it was not the death benefit that was being taxed it was a large Ira distribution which was

54:43

related to the the previous question I think so um I think that our service

54:48

center uh figured out the there were some entries in that plan that if we remove them it should work the way you

54:55

expect yeah a couple things on here if you do have a situation where something isn't

55:01

uh showing the way you it's supposed to be showing please put it in a case with our uh support desk it's support incom

55:08

la. we will pop that in the chat as well and then also uh someone asked them about some training workshops um we do

55:15

offer all of our users one-on-one individual training um so that's something if you haven't had we do offer

55:22

that as well um the trick to that last one I think that plan Had Each account

55:28

had a a distribution plan associated with it which is overriding what the software would do automatically and so

55:35

if you remove those distribution plans and let the software work its magic it'll it'll do what you

55:41

expected um there we have a couple more fibers let's try to squeeze them in um do you have any perspective or research

55:48

accounting for the third scenario living long but with significant health

55:54

issues um yeah I mean that is a really tricky tricky one it's true like if you were planning for an extremely short

56:01

life um but then it turns out you were wrong and you just um the nice thing is

56:08

it's true that is a a slightly riskier scenario even with the sophisticated Stu that we're doing the nice thing is that

56:14

as the person lives again we will never assume that they actually will die right

56:19

so we're always pushing it out so even if you had 30% expectations instead of 60 we're still pushing out the life

56:28

expectancy as time goes on so as you live the plan will the plan never assumes that you you died yesterday or

56:33

that you'll die tomorrow so it's actually you're you're cushioned a little bit there but but it is true

56:39

getting you know being wrong about uh about that um assessment of your own

56:45

longevity expectations is still a potential problem G to have two questions with pension are these pension

56:52

Social Security adjustments currently incorporated into the software right now

56:58

yes and then with that many public pension systems use adjustments on the

57:04

base simple versus compound and the maximum coal adjustment limits caps in

57:09

their pension benefit formulas properly modeling these in income lab seems to be

57:14

challenging um when might the the custom inflation adjustment feature in income

57:20

lab be modified to allow these features please reach out to the support

57:25

team and and they can enter a future request of that sort um we would want to

57:31

understand what truly would be helpful to you um and and so it would be helpful to have kind of the expertise if

57:37

somebody works in public pensions a lot or any pensions and they kind of know the what the uh the range of things that

57:45

would be useful we would be happy to include that how do we balance the risk of

57:50

clients running out of money early parentheses clearly they can blame us as the advisor versus them dying with more

57:57

money than they need and thus having a bigger Legacy which is typically the top

58:02

three goals of my that my clients have when they don't have known when they don't have known

58:09

the difference yeah yeah I mean it's true like the the cost to an advisor uh

58:15

clearly is lopsided towards spend less right so all us being equal it it is

58:20

it's a lower cost to me if you end up with more money than you'd hoped than if you you know run run out of money now

58:27

the fact is if you're doing updated planning running out of money is is much less of a of a risk because you have

58:33

guard rails that involve tapping the breaks um so I think that it's possible to

58:38

balance those incentives um pretty pretty easily I think it's it's it's fine to to recognize that those are your

58:45

incentives um but I do know from a lot of stories that clients really

58:51

appreciate a kind of a value proposition for retirement planning that revolves around my job is to help you live the

58:58

most fulfilling life you can the you know a life free of worry yes but also

59:03

full of the experiences you want um that's a great a a great goal to have a

59:10

great kind of mission statement for retirement planning so that gets at that what you were talking about that hey there really are two risks we call it

59:17

the risk of regret which is you didn't spend enough and the risk of overspending and we they're both very

59:23

real and if you talk with clients and Prospect about those risks I know that it resonates um I think what we went

59:30

over today and that we have an income lab there are lots of ways to make sure that you're not overspending even though

59:38

you are you know letting people uh take advantage of the the resources that they

59:44

have all right well we definitely have more questions and we will do our best to address them um in followup support

59:53

tickets um that's our typical standard follow-up process is if you have questions that are outstanding we pop

59:59

them into support and have our team members answer it or Justin answers it um so with that we'll conclude as we are

1:00:05

a minute past time thank you all for attending we do have a survey at the end that asks uh for feedback and other

1:00:13

topic suggestions um so thank you all thanks everybody