ERISA attorney Marcia Wagner says increased life expectancy raises financial risks for clients, requires careful planning.
Attention advisors: A mostly unheralded change in actuarial tables suggests the need to plan for longer retirements for your clients and could also make a delay in claiming benefits advantageous for some clients.
That is the upshot of a recent client communication from ERISA attorney Marcia Wagner of the Wagner Law Group.
The Boston-based firm’s February newsletter notes that the Society of Actuaries (SOA) released new mortality tables last October that reflect substantially increased longevity for 65-year-olds in comparison with SOA’s year 2000 tables and adjustments that have been used by defined benefit pension plans to date.
The new tables show a 10.4% life expectancy increase for 65-year-old men (compared with 2000), from 19.6 years to 21.6 years, and an 11.3% improvement for women, from 21.4 years to 23.8 years since SOA’s 2000 tables.
The good news about increased life expectancy at the same time signals an expected increase in the cost of pension annuity payments, Wagner says in her newsletter, citing SOA’s forecast that retirement liabilities will rise from 4% to 8%.
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The new mortality assumptions, if their adoption is mandated by the IRS as conventionally assumed, will require plan sponsors to increase plan contributions lest funding ratios fall.
What’s more, use of the new tables — which Wagner expects to go into effect in 2016 (IRS regulations use the old tables in their 2015 calculations) — will necessitate larger lump sums to retirees, which, the ERISA attorney argues, would incentivize plan sponsors to encourage lump-sum payments before the new tables are officially adopted.
From the retiree’s perspective, a financial advisor might have the opposite incentive to encourage delay of annuity benefit claims.
Reached by ThinkAdvisor, Wagner put the emphasis not on increasing benefits but the increased financial risk implied by today’s longer life expectancies.
“Financial advisors should be having frank discussions with their clients regarding ‘longevity risk’ and the resulting need to save even more, spend less, invest wisely and, also, potentially work longer—not just for the resulting increased benefit under defined benefit pension plans, but in order to earn money longer and stave off spending retirement savings,” she said.
Source: Think Advisor