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Archive for the ‘Longevity’ Category

Surviving the longevity “Sharknado”

October 21st, 2013 No comments

Matterson-WadeYou’re probably well aware of the Sharknado phenomenon—a straight-to-television disaster movie, where a water spout lifts sharks out of the ocean and deposits them in downtown Los Angeles. The heroes deal admirably with this inexplicable influx of predators and after much bloodshed, emerge victorious.

While the movie was distinctly B grade, the media hype that accompanied it was simply astonishing. It got me thinking about what makes a good/bad disaster movie, given the formulaic approach they tend to adopt:

1. Think of some absurd concept—the crazier the better.
2. Identify with an individual or group fighting to survive.
3. Against all odds, and with much bloodshed, the hero overcomes all.

This is all well and good, but what does this have to do with financial planning? Well, it seems that as an industry we are potentially in the midst of our very own, slow-moving disaster movie—that is, the onslaught of the aging population and the impact of longevity. Now while seeing a great white pointer coming out of a tornado may seem slightly more daunting than a geriatric surfing a tidal wave, the impact of the latter is much more profound, predictable, and likely.

The statistics themselves are simply staggering. By 2050, almost a quarter of the population will be over 65 compared to 14% now. Given that almost 65% of all superannuation assets are held by people between the age of 45 and 54, the amount of money in motion as this group retires will be too large to ignore. As our “Politics of Pensions” thought piece highlights, the implications are broad and will impact on all corners of the Australian community, from business owners and taxpayers through to government policy makers.

When observed through this lens, the impending pressure of longevity has much in common with our traditional disaster movie. It’s no surprise that much of the language adopted by the media and those in the industry attempting to highlight the issues is very similar to what you might find on a movie poster—the “Longevity Tsunami” paper written by the Actuaries Institute (available here) is a good example.

Combine this with the impact of the sweeping reform that the industry has been subjected to, together with rapid technological advances, and the industry is facing a perfect storm (another great disaster epic). The ramifications for the advice industry are immense. Faced with increased demand, regulation, and complexity, there is both a risk and opportunity that presents itself to those up to the challenge.

Fortunately, we’re already seeing potential heroes step up to take on these issues head on. Successful advisers and early movers in this space appear to be taking similar paths, by:

• Retooling their advice proposition to become more strategic in nature, with increasing focus on client objectives
• Developing a hunger for understanding the complexity of the issues and becoming subject matter experts
• Leveraging the latest analytical tools to offer greater insight and value add

From the perspective of this website, both Lonsec and Milliman have set out to accompany you on this mission. As your partners, we intend to provide you with the necessary advice, research, and tools—all in a single and convenient location. We understand that there is not a silver bullet to solve these issues and that ultimately it will be a joint effort.

To this end, this site intends to provide relevant information across the following areas, including:

• Thought leadership
• Research
• Portfolio construction guidance and advice

There are also some exciting plans for the future, including the development of discussion forums and a variety of tools to assist advisers in their implementation of objectives-based advice.

Most importantly, we believe that the subscriber community has plenty to add in this space and that we will all benefit from the sharing of experience. You’re invited to participate in the conversation and we look forward to your comments.

With all this at your fingertips, we’ll help you navigate the challenges and avoid becoming shark bait.

This article first appeared at LonsecRetire.com.au.

Are longevity plans in retirees’ future?

March 21st, 2013 No comments

Longevity plans could one day address some of the financial uncertainty associated with longer life spans. The concept is designed to offer retirees a supplemental defined benefit (DB) pension (i.e., a longevity plan) alongside their defined contribution (DC) plan.

This article in Retirement Income Journal (subscription required) highlights the Milliman paper “Longevity Plan,” explaining how such a plan may reduce longevity tail risk while providing retirees sustainable income past 80 years old. Here is an excerpt from the paper outlining the plan’s features:

In order for the DB plan to be viable in its role as a supplementary retirement vehicle, its structure will have to be different from that of the traditional DB plan with which many are already familiar. The DB plan that is being proposed here is essentially a longevity plan. Key features of the proposed longevity plan include:

• Unit-accrual pattern such as in a career-average plan or a plan based on flat dollars per years of service
• Simplistic retirement options: No ancillary death, disability, or early retirement benefits would be offered (other than perhaps a lump-sum death benefit between termination and the pension actually starting)
• Life annuity options only: A single-life option for single participants and 75% joint and survivor option for married participants
• Participants would not begin plan participation before age 45 (although this could be extended to age 50)
• Participants would not commence benefits earlier than age 75 (and this could be extended to age 80 or 85)

Presently, ERISA prohibits employers from postponing pension payouts later than age 65 generally. Bill Most and paper co-author Zorast Wadia were quoted by Retirement Income Journal discussing the rule.

Here’s an excerpt from the article:

This “unit-accrual design” is still just a concept, not a product. But the authors of the paper think the only thing that prevents it from widespread adoption is an outdated ERISA regulation against delaying pension payouts past age 65.

“Everyone’s talking about this and lots of new products has been proposed,” said Bill Most, a Milliman principal who worked on the paper with principals Zorast Wadia and Daniel Theodore and consulting actuary Danny Quant.

“But we don’t need new products, we need changes from government. And the results will hopefully give us something that employers might embrace. We’re not kidding ourselves. We don’t deny that there’s a lot of bad faith toward defined benefit plans. But from a cost perspective, this makes sense.”

…“They’ve relaxed certain rules related to required minimum distributions starting at age 70½, but they have not made changes in the terms of defined benefit plans,” said Zorast Wadia. “If you’re no longer working, you must begin payments from a defined benefit plan no later than age 65. If you’re still working past age 65, they won’t force you to take benefits. But ERISA won’t let the company purposely delay payments beyond 65 if you’re retired.”

For more perspective on longevity plans, click here.

Assessing today’s retirement landscape

June 20th, 2012 No comments

Longevity poses a challenge for retirees with defined contribution plans, because there is always risk of someone outliving his or her savings. A new application for defined benefit plans as a supplement to defined contribution plans may help provide longevity protection.

In his new article on MoneyManagementIntelligence.com, Zorast Wadia outlines this approach, known as a “longevity plan.” Here’s an excerpt explaining how such a retirement model would work:

“In order for the longevity plan concept to succeed, it will need to provide annuity protection to plan participants, be relatively easy to understand and administer and be affordable to plan sponsors. To accomplish the goals of longevity protection and cost reduction, some changes will be necessary to current pension laws including allowing employers to limit plan participation to later ages (e.g. age 45 and beyond) and defer benefit commencement to later ages (e.g. age 75 and beyond). To allow for ease of administration while still offering longevity protection, forms of payment would need to be limited to life and joint and survivor annuity options. The longevity plan would also eliminate investment risk since annuitants would receive guaranteed employer-funded benefits from the longevity DB plan. With the longevity DB plan in place, participants would be free to adjust their investment strategy with respect to benefits accruing from their DC plans. Participants with a higher risk tolerance could invest more aggressively with respect to their individual savings accounts.”

For more on this concept, check out another article by Wadia, “Longevity Risk & Retirement,” which first appeared in the spring 2012 issue of the Actuarial Digest.

Previous Milliman Insight articles have also assessed longevity plans. “Saving for retirement: What can employers do?” discusses how a “layered longevity plan can potentially ensure that people do not outlive their retirement balances for an uncertain duration.”

For more perspectives on longevity risk and retirement planning read our four-part retirement landscape series, where our team of Milliman consultants accesses the array of risks facing retirees and plan sponsors, and provides feasible solutions to them.

Can you prosper if you live long?

August 5th, 2011 No comments

Live long and prosper, a phrase made popular by the classic sci-fi entertainment franchise, Star Trek, may sound like an oxymoron to some. For many, living a long life could mean running out of retirement money. We’ve written about this before, noting that some people are more afraid of running out of money in retirement than they are afraid of their own demise. Recently we even introduced the concept of a longevity plan as a way to avoid outliving your retirement funds. So this week we’re asking what the best solution is for the “problem” of living too long?

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Introducing the longevity plan

August 2nd, 2011 No comments

Our recent Retirement Landscape Series introduced the idea of a “longevity plan.” What’s that? Here’s a description:

A layered longevity plan is one potential way to ensure that people do not outlive their retirement balances for an uncertain duration—due to the fact that no one knows their precise longevity. In the layered longevity plan scenario, employers would fund a DB plan that is specifically designed for longevity protection. The longevity plan would come into effect later than today’s retirement plans (e.g., age 80) and would provide lifetime income throughout the duration of an uncertain longevity horizon. Because fewer employees would live long enough to claim benefits compared to traditional DB plans, longevity plans would be less expensive to fund. Longevity plans are not allowed today because employer-provided retirement benefits are required to come into effect no later than age 65.2 If the regulations change, the combination of an optimized DC plan for the bulk of retirement with the security of a longevity plan could provide a very attractive retirement solution.

Interestingly, such a scenario would represent a reversal of the historical pattern. DC plans began as a supplement to DB plans and later became the rule rather than the exception. This solution would have DC plans as the main retirement funding model with limited DB plans for longevity protection. The retirement funding challenges facing the aging U.S. population cannot be solved by employers alone, but they cannot be solved without them, either. Creative thinking and an analytical approach are both required if employers are to play a leadership role in the retirement landscape of tomorrow.

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Annuities as a solution to longevity risk

March 23rd, 2011 No comments

Kiplinger’s Retirement Report picks up on a sound retirement planning concept: Using an annuity to create a regular paycheck. Here’s an excerpt:

Finding a way to provide guaranteed income could be crucial if retirees fear outliving their savings. “Many people do not understand life expectancy,” says Noel Abkemeier, a principal at Milliman. Average life expectancy for a 65-year-old male is 84.2 years, and it’s 86.1 years for a 65-year-old female. But, says Abkemeier, “there’s a 50% chance you could live longer than lif expectancy–and it could be 10 to 15 years more.

No wonder there is so much apprehension from future retirees over outliving their benefits. So what’s a retiree to do? Going back to the Kiplinger piece:

Longevity insurance will maximize your retirement income at a time when you may need money to pay for long-term care and other medical expenses. It is best if you think about it as an insurance against living too long, rather than as an investment that may never pay out. Abkemeier recommends investing no more than 10% of your portfolio in longevity insurance, so you’ll have plenty of money for your other needs.

Of course an annuity is not the only way to go. The key thing is for retirees to recognize the risk and prepare accordingly.

The risk of outliving your assets

January 5th, 2011 No comments

The Society of Actuaries (SOA) released the results of a new study today indicating that nearly half of Americans have no plans in place should they outlive their assets. This is one of several topics of discussion at the “Living to 100 Symposium” scheduled for this week. Here is an excerpt from the SOA’s press release:

“While living past one’s expected age can mean more time with family and friends, it can also pose potential financial, physical and societal risks,” says Timothy Harris, FSA, MAAA, symposium co-chair and principal at Milliman. “At this year’s Living to 100 Symposium, experts will present more than thirty papers, which address these issues, and will work together to find some potential solutions to help people mitigate and prepare for those future unforeseen risks.”

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Living to 100

December 13th, 2010 No comments

Investment News looks at the ever-perplexing question of what  it takes to become a centenarian. The coverage includes a look forward to the “Living to 100″ research symposium scheduled for next month and sponsored by the Society of Actuaries. One likely area of focus at this symposium is the genetic component. Here’s an excerpt from the article:

“Some of these people have atrocious lifestyles; the most important factor is genetics,” said S. Jay Olshansky, a professor of public health at the University of Illinois at Chicago. “You have to win the lottery at birth to have any chance to live that long.”

In a classic example, he referred to Frenchwoman Jeanne Louis Calment, who lived to be 122 years old before passing away in 1997.

So if smoking does not necessarily prevent someone from living to be 100, what does?

Actuaries pointed out that obesity is the wild card in the latest life expectancy studies, even as improving medical technology and declining smoking rates help reduce mortality.

“In general, we continue to see improving longevity, but the one factor that might turn that around and cause that to reverse is obesity,” said Steven I. Schreiber, principal and consulting actuary at Milliman Inc.

Are women prepared for a longer-term retirement?

December 10th, 2010 No comments

The Society of Actuaries has released a new report looking at unique retirement challenges facing women. Here is an excerpt from the press release:

While half of women at age 65 will likely live beyond age 85, 92 percent of female retirees and 89 percent of female pre-retirees do not plan far enough in the future to cover this 20-year period. A new report from the Society of Actuaries (SOA) highlights these gaps in planning and offers an actuarial perspective on techniques for addressing these retirement concerns. The report, The Impact of Retirement Risk on Women, identifies findings from the 2009 Risks and Process of Retirement Survey Report, and focuses on issues in the survey specifically as they relate to retirement concerns for women.Given the fact that women outlive men on average by three or four years, women need to better plan for various risks, such as inflation, outliving assets and the need to cover long-term care costs. Despite similar perceptions of retirement risks between men and women, actuaries caution that the affects of risks on women can be quite different, and therefore an understanding of post-retirement risks women face is particularly important. For example, the expected average value of the cost of lifetime long-term care services is $29,000 for males and $82,000 for females, in 2000 dollars, which highlights the need for women to better prepare for the risk of incurring long-term care costs in retirement.

The full report is available here.

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