section 1 - The American College Online Learning Center

e. Factoring personal and family health history can be another predictor of lifeexpectancy and another way of determining a proxy for the end of life. Seewww.livingto100.com for a life expectancy calculator that factors personal health,family history, and other factors.f. Planning Point: When planning for a couple, planners should focus on thelongevity of the second spouse to die.g. The problem with longevity risk is that an educated guess, however, is still a guess!h. Longevity risk only exists if the planner has not planned for the client to live to theadvanced age. The natural reaction of planners may be to assume the clientwill live to 100 or 105 to counteract any longevity risk complications. However,planning for a client to live to 100 or later will put an undue burden on the client’slifestyle unless they are super-affluent and will be an unworkable solution to thelongevity risk problem for most clients.i. Planning Point: Longevity has increased over time and new medical advancescould bring additional improvement to life expectancies in the future.j. Planning Point: Longevity compounds a number of other retirement risks. Forexample, it increases the need for long-term care and health care.3. Excess withdrawal risk (also known as portfolio failure risk) is the depletion of retirementassets through poorly planned systematic withdrawals that lead to the prematureexhaustion of retirement resources. Your clients should be concerned about spendingtoo much too quickly for several reasons:a. In retirement, income for monthly expenses is provided in part from withdrawals ofaccumulated assets as opposed to salary from an employer.b. If the client consumes assets too quickly, he or she will run out of resources toconvert into a stream of needed income in the later years of retirement.c. Planning Point: Clients often perceive the asset pool at retirement as an invitationto overspend early in retirement because they are dealing with more money thanthey have ever controlled at any time in their life. However, clients must resist thetemptation to overspend early in retirement. Planners must instruct the clientabout the percentage that can be drawn down each year that will preserve assetsuntil the client’s death.d. Example: Greg decides to draw down 15 percent of his portfolio each year ofretirement. He will soon find out that he is consuming assets needed for thelater years of retirement to support an overgenerous lifestyle in the early yearsof retirement.e. Planning Point: At most, the annual drawdown rate could equal the rate of returnon the investment portfolio. Any higher, and the portfolio is assured of beingdissolved. However, because of sequence risk (to be discussed later), it ispossible to have a withdrawal rate that is less than the average investment yield,and still have the portfolio disintegrate. The historical rate of return on equitiesdepends on what time period one analyzes. But over really long time periods,the rate of return on equities would appear to be about 9 – 10 percent. Giventhat most portfolios of retirees generously incorporate substantial amounts ofbonds whose rates of return are less than that of equities, the rate of return onthe retiree’s assets will be well below the 9 – 10 percent mark. Hence, withdrawalrates of 6 – 7 percent are about as high as one would want to go.f. Planning Point: Clients who own an annuity or who have otherwise securedincome to pay for their basic expenses are in a different position to take systematicwithdrawals than clients who have not locked in payment of their basic expenses.5.2