The Actuaries: Longer Client Life Spans Require Big Shift by Advisors

There is too much of a focus on income generation in retirement, she said. Though advisors do gain an understanding of what their clients want to do in retirement in order to plan finances accordingly, they're unwittingly viewing retirement as a "block" instead of something much more segmented that moves in phases and changes as clients age.

It isn't just about planning for changes in housing (moving from a private home to a nursing facility, for example) or calculating the cost of long-term health care, which many financial advisors and clients have addressed. For Rappaport, an extended planning horizon should include the more esoteric and hard to quantify "life portfolio."

"I'd define a life portfolio as those activities a person might have in retirement," she said. "Maybe someone has a part-time job, maybe they take care of a grandchild. Maybe in the years immediately following their retirement, they play tennis every day or volunteer for a half dozen things. All of these are items that give meaning to a life. Because they're important in defining who someone is and what they do, they're important for financial planning in retirement."

Just as clients should be saving and planning for adequate income in retirement, Rappaport said advisors should encourage their clients to start developing life portfolios as early as possible. How these interests and activities will pan out in the future will become clearer not only in the five years or so before retirement, she said, but throughout a person's working life, "I believe it's important to have a life portfolio that helps them know who they are because ultimately, being passionate about things is very important."

The Key Role of Annuities

The qualitative and quantitative aspects of longevity are a key area of focus for the Society of Actuaries via its "LIVING to 100" effort, which includes a triennial international research symposium that brings together thought leaders from around the world to share ideas on aging (an issue that impacts many countries around the globe), increases in survival rates and the resulting increase in aging populations, together with the implications for social, financial, retirement and health care systems.

As an actuary, Gebhardtsbauer—who prior to teaching at Penn State served as senior benefits advisor to the chairman of the U.S. Senate Committee on Finance—also believes that advisors must do a more thorough job of encouraging their clients to purchase annuities. While annuities have received a great deal of negative press, especially among fee-only advisors, he suggested the products have improved and advisors shouldn't ignore them anymore.

Clients should purchase annuities before they reach retirement, since "having chosen an annuity and the chance to be golden the rest of your life" is a huge positive, Gebhardtsbauer said.

Gebhardtsbauer views annuities as crucial in managing longevity risk because they provide a steady income stream, but he cautioned that a whole lot of income may not be so necessary in clients' advanced ages.

"A big part of the problem today is that everyone believes they are going to need so much more than they actually will when they're living into those very old ages," he said. "People want to make more and more money now because they think that's going to be important later on, and they're much more focused on accumulation than they should be."

With the increased probability that people will live into their 90s if not beyond, "it's good to have an annuity that will go as long as you live and you don't have to worry about the stock market crashing," Gebhardtsbauer said.

Purchasing annuities is not an absolute guarantee for longevity risk, of course, but it is one key strategy to reduce the risk of outliving your financial resources.