Life tables have shortcomings

Advisers using the Commonwealth’s life expectancy tables could be considerably under-estimating their clients' lifespans.

“The life tables are a useful guide, but they don’t give an accurate picture,” My Longevity director David Williams said.

“The problem is they don’t take into account the actual mortality rates.”

The problem has arisen because life expectancy tables have not caught up with the fact that people are living longer.

This can add four to five years to somebody’s lifespan compared to the tables, Williams told the Kaplan Financial Adviser Roadshow in Melbourne.

“The fact is the longer a person is alive, the longer their lives are going to be,” he said.

“As mortality rates are dropping, using the tables will lead the adviser to make mistakes in their assumptions of how long clients will live.”

Advisers should be using cohort life expectancy tables as these include mortality rates.

Another factor to consider when determining life expectancy is many financial planning clients are from upper socio-economic groups and have access to better health care, and this can add another five years to their lives.

“We would probably be looking at 17 years of retirement for a male and longer for a female,” Williams said.

“Getting the life expectancy figures wrong is not just a matter of ethics, there are compliance issues as the adviser is misleading the client.”

He said these are crucial issues but few planners seem concerned despite improving statistics on people’s lifespans.

Another factor to be considered with people living longer is the growing dependency on carers and increased medical costs.

While cancer and circulatory problems are still the major causes of death in older people, dementia is catching up fast, Williams said.

“People living beyond 85 will see 22 per cent of them suffering some form of dementia,’ he said.

This will lead to higher medical and carer costs despite the person living to almost their normal lifespan.

For financial planners, the cost of carers and nursing homes will have to be factored into a client’s retirement plans.

Williams said regular reviews of clients' financial and medical situations will need to be conducted, which is an opportunity for the adviser to build a relationship with the client.

It also creates the opportunity to bring the children into the client base as they will become heavily involved in the decision making of their parent’s future needs.