Noel Abkemeir, principal and consulting actuary with the Chicago office of Milliman, thinks Benjamin Franklin got it half right when he wrote that nothing is certain but death and taxes.
“That was in the 18th century,” Abkemeir writes in a recent article about annuities. In the 21st century, nothing is certain but longevity and taxes.
As he points out, although longevity is a known financial risk, it’s not very well understood. We tend to reduce it to “average life expectancy” in retirement planning, and therein lies the problem.
“Planning only though life expectancy is like pretending that longevity does not exist.” In fact, longevity “begins at life expectancy”—the risk is that an individual will live longer than average.
Moreover, purchasers of annuities tend to be healthier, and live longer, than the general population. And we’re adding about 1.5 years of life expectancy every year to the general mortality rate. Don’t overlook the possibility for significant life-extending medical breakthroughs, either.
Retirement planning needs to take into account both the possibility that someone will live a long time and the uncertainty of just how long that will be.
Abkemeir, who specializes in the design and pricing of annuities and life insurance products, thinks annuities can address longevity risks in market segments, particularly high-income retirees who show mortality as much as one-third lower than purchasers of small annuities, according to research published by the Society of Actuaries. Consequently, their planning horizon is about three years longer.
How best to manage longevity risk? Abkemeir outlines a few annuity-based approaches that can address the longer-term need for income among higher income clients.