How to factor lifespan and health—two big wild cards—into financial planning
Published in Wall Street Journal on 2/27/2020 https://www.wsj.com/articles/a-big-question-in-retirement-planning-how-long-will-i-live-11582803000
No one knows how long they will live or how healthy they will be, which makes retirement planning tricky. But a growing number of online tools and services are aiming to help people obtain personalized lifespan estimates for financial planning.
Startups are selling tools that incorporate genetic and other tests that assess the probability of getting Alzheimer’s disease or reaching advanced ages. Calculators are asking about wealth and education, which academic studies show are highly associated with life expectancy.
“No one can predict definitively how long someone is going to live,” said S. Jay Olshansky, a professor at the University of Illinois who has ties to two startups that provide individualized projections. “But we can say, ‘For someone your age and gender, with your level of income and education, your body-mass index and sleep and exercise patterns, this is what science tells us you are likely to experience.’”
How long we live and how many of those years are healthy are two of the “biggest unknowns in retirement income planning,” said Moshe Milevsky, a finance professor at York University in Toronto who advocates using biological measures of aging to refine retirement planning.
Armed with more precise life-expectancy forecasts, individuals can make better-informed judgments about when to retire and claim Social Security, how much to save and spend and whether to buy an annuity or long-term-care or life insurance, said Prof. Milevsky.
Some advisers say this technology won’t cause them to change their approach because their clients need to be prepared for a range of outcomes. Someone in poor health might still live to 95, or have a spouse with longevity, said financial adviser William Bernstein.
Moreover, “most people should at least consider that no matter how healthy they are, they could face enormous medical costs,” he said.
Still, I found these tools helpful in stress-testing my financial plan. Here’s what I discovered in this emerging space—and how I plan to use the results.
To figure out how much workers need to save for retirement, many financial advisers start with an estimate of lifespan. Many rely on population life-expectancy figures, then add some number of years to reflect a client’s family history of longevity or worries about outliving savings.
Using an online calculator that asks the obvious questions, including age and gender, along with ones about friendships, marital status, stress, education, blood pressure and more, I was told to expect to live to 103. That’s almost two decades longer than the Social Security Administration’s life-expectancy calculator indicates for a woman my age.
Prof. Olshansky says calculators often produce “exaggerated” results because they assign “longevity credits” for each factor that’s positively associated with longevity and add the credits. “In the real world, these variables are not additive,” he said.
Using a methodology that weights the results according to their correlations to longevity, Prof. Olshansky advised on the development of a calculator for a startup called Wealthspan Advisors. Mainly geared to financial advisers, the company is preparing to launch and plans to make the tool free to advisers that affiliate with it. It also intends to sell financial products, including life insurance and annuities, and analyze test results from 23andMe Inc. to identify genes associated with longevity and Alzheimer’s for up to $175, said Chief Executive Kirk Ashburn.
Wealthspan’s calculator took into account my height, weight, marital status and the number of hours I typically sleep and exercise daily. Prof. Olshansky also asked questions including my total years of education and whether I smoke or have lost the ability to perform any “activities of daily living,” such as dressing or bathing. The process gave me an estimated lifespan of 88 years.
This means “of 1,000 women with your characteristics, the average duration of life would be about 88 years,” Prof. Olshansky said.
If I were to take a genetic test and discover I have the FOX03 gene, which is associated with longevity, Prof. Olshansky said he would raise my odds of living past age 90.
The bad news, he said, is that I should assume I will have about three to four years of poor health at the end of my life. That is “what we see on average for people your age” with no difficulties handling activities of daily living, he said. Given my exercise habits, that period of illness might be shorter, he added.
A growing number of companies collect blood or saliva to analyze internal indicators of aging, including longevity genes and the length of a person’s telomeres, which are bits of DNA that protect chromosomes from damage. The goal is to shed light on the pace of aging and the likelihood of developing diseases.
Prof. Milevsky said his wife recently gave him a telomere kit for his 50th birthday. He spit into a tube and six weeks later, the company—which he declines to name—notified him that his “biological age,” based on the length of his telomeres, was 42.
Steven Austad, scientific director at the American Federation for Aging Research and a scientific adviser to Wealthspan, said genetic tests are “somewhat predictive.” (Genes are widely considered to account for about 20% of longevity.) He said he has high hopes for a relatively new technology that tracks markers on DNA that can indicate biological age.
But he and others have reservations about using telomere length, which shortens over time, to predict life expectancy. It varies between individuals, making comparisons to a median for the population of limited use, and is best measured over time. But because of differences in test methods, the measurements should be conducted by the same lab, according to Carolyn McClanahan, a financial planner and doctor in Florida.
Using the results
Because I have a lot of long-lived relatives and exercise a lot, I have always assumed I’m likely to live into my late 80s or maybe even my 90s. Getting estimates that confirm that hunch makes me more confident in my plan to delay retirement and Social Security, and contribute the maximum to my health savings account, a tax-advantaged savings account for medical expenses that I can use now or in retirement.
If I were to test positive for the APOE4 gene that puts people at higher risk for Alzheimer’s, I would consider changing my financial plan to add long-term-care insurance.
But Prof. Austad’s observation that “there is so much randomness to when people die” also makes me want to hedge my bets—not by saving less or retiring earlier, but by ticking off the items on my bucket list now. There’s only so much you can plan.