How to address longevity risk

Speaker 1 (00:08): Hi, and welcome to Your Thriving Practice, a podcast from Global Atlantic. I'm your host, Jenn Bernstein.

Speaker 1 (00:18): In our previous episode, Global Atlantic's Thea Marasa Scafidi talked about three critical risks clients are facing these days, the market longevity and inflation. What we heard in that podcast is that while both the market inflation go up and down, longevity or the fact that we're living longer than ever before is a constant force with a long-term impact on retirement planning. But what we also have seen is that while longevity is a constant, age is not, and that brings us to the latest episode of Global Atlantic's, Your Thriving Practice podcast. Our guest today is Moshe Milevsky. Moshe is a professor of finance at the Schulich School of Business at York University in Toronto. He also serves as the executive director of the Individual Finance and Insurance Decision Center, or IFID, a nonprofit organization dedicated to generating advanced research on what he calls the intersection of wealth management, personal finance and insurance.

Speaker 1 (01:22): Moshe's authored several books, but his 2019 volume Longevity Insurance for a Biological Age is most relevant to our discussion today. In the prologue to the book, Moshe recalls a graduate school paper he wrote some 30 years ago called How to Avoid Outliving Your Money. Clearly clairvoyant. Given the expansion of life expectancy over the past 30 years, the paper came to the conclusion that the answer was annuities. That's another topic we'll discuss with Moshe today. So let's dig in. Moshe, thank you so much for joining us. You've had an incredibly impressive and interesting career, so we're really glad to hear from you today.

Speaker 2 (02:00): Thank You. Pleasure to be here.

Speaker 1 (02:02): So, first of all, I have your book right here, and in that book, you say you have a passion, or dare you say, an obsession with annuities. That stuck out to me. What's so interesting about this financial tool?

Speaker 2 (02:14): Well, you know, annuities have been around for hundreds, if not thousands of years. They precede stocks and bonds. Uh, annuities were bought by people who wanted income for the rest of their lives, and annuities were sold, whether they'd be kings and queens or municipalities, kingdoms, cities, uh, in order to finance some of their operations. So I'm interested in it because they've been around for so long and I think because they're very crucial to retirement planning, which is something we can discuss.

Speaker 1 (02:44): So Moshe, underlying our conversation about longevity and financial planning, is the idea yours as well, that there's a profound difference between chronological age and biological age. First, can you explain what chronological age is versus biological age?

Speaker 2 (03:00): Sure. I think it's important to take a step back and to ask ourselves why age is so important, uh, in the financial planning process. You know, when you go to buy a watch, I don't think the age is very important. You'd go buy a pair of shoes, the sales person doesn't care how old you are. But somehow in financial planning and investment planning, uh, when you're managing your money, age becomes very important. We want to know your age, why do we care about your age? And the reason is because age is giving us some sort of proxy. It's giving us some hint of how long you're gonna live. You know, when you're at retirement, you wanna make sure your money lasts as long as you do. You wanna make sure that you don't outlive your money to use a term that you mentioned earlier. And age seems a good way of doing that.

Speaker 2 (03:45): You know, if you're 30, you have a very, very long time to go. If you're 90, you don't have as long to go. So age is important because we want to look forward and see how long you're going to last to make sure your money lasts as long chronological age, which is simply the number of times that you circled the sun, your birthdays, how many birthdays you've had. Sure is a very backward looking measure. It's counting how many times you've done something. It's not giving us a good sense of what lies in the future, which is what retirement planning is all about. How long am I going to live? So we're using a very imperfect measure. How long and how many times have I done something circled the sun, birthdays, candles on a cake? That's history to try to predict into the future how long we're gonna live. That measure isn't perfect. That's where biological age comes in. It's a more accurate assessment of how old you really are. And the reason that's important is that's going to give us a much better sense of how many years you still have to go.

Speaker 1 (04:51): Interesting. Alright, so how does this concept factor into another concept which you've frequently discussed? The longevity risk.

Speaker 2 (04:59): Longevity risk is, is a term that's used to describe the uncertainty about how long someone's gonna live. Uh, to be honest, I've used the word longevity risk, and it has become ubiquitous in the industry. But longevity, if you think about it, isn't really a risk, it's a blessing. In fact, my grandfather, many, many years ago, rest his soul when I was in graduate school, you know, 30 years ago, I would talk to him about longevity and planning for longevity and occasionally I would slip and say, how are you managing longevity risk, grandpa? And he would say, Moosh, longevity's a blessing, stop calling it a risk. It's a great thing to have longevity. So obviously longevity is a great thing and the longer you live the better it is. But the cost of that is the challenge here. You know, how do you finance such a long period of time?

Speaker 2 (05:45): And it is simply unknown. We really don't know how long that's going to be. And getting back to the concept of biological versus chronological age, retirements, you know, tend to be something that doesn't have as much uncertainty associated with it. You know, you're 30, you kind of know you're gonna work for the next 25 or 30 years. The uncertainty about when to take social securities at 62 or 67, you know, five, six years. But the uncertainty about how long we're going to live, that's a very, very wide margin. So, longevity risk is a catchall term for the fact that this dispersion, how long does the money have to last is really very wide and very difficult to plan for. And, and that's why we need to think a little bit more creatively when it comes to retirement planning.

Speaker 1 (06:33): No doubt about that. Well, obviously the idea that biological age not necessarily correlating with chronological age has tremendous implications for financial planning. Since if you think you're 65, but biologically you're 55, you have 10 more years to both plan and possibly to live while if biologically you're 75, well then, you know, we know what that means. The question then is how is biological age determined?

Speaker 2 (06:59): So that's, you know, a topic that you can go down the rabbit hole to quote Alice in Wonderland because that is a medical issue that is still being discussed. And you know, if you think about it, no two specialists in aging has a perfect measure for biological agent will agree. So the answer to your great question is that there are a whole bunch of methodologies out there. Think of it as a whole bunch of different tests to figure out how old you really are. Physiologically how old are you from a functional point of view, how old are you? There are some tests that have been around for 20 or 30 years that people might have heard of. One of it is known as a test of your telomeres, TEL telomeres. And that's simply a test of how quickly your aging by looking at your chromosomes.

Speaker 2 (07:47): You know, not to get too technical here, and I'm not a medical doctor so I don't wanna overstep my expertise, but your chromosomes have ends that are akin to shoelaces where they have caps at the very end of the shoelace. And those caps, the telomeres, uh, over time tend to shrink, which is not good because that means you're aging and, and it shrinks for all of us. And, and what some of these biological age tests do is they measure the rate at which those telomeres are shrinking or they simply measure your telomeres relative to the rest of the population. And to put this in plain English, if the caps at the end of your shoe laces are really, really short, that's not good. Your biological age is older, and if the caps at the end of those shoelaces are really, really long, that's great. You're biologically younger than your chronological age. So that's one of about six or seven different ways in which they measure biological age. Other tests focus on changes in your DNA, some look at proteins in blood, other ones look at things like blood pressure and cholesterol. So there are many tests out there that attempt to arrive at biological age, and they all give you different numbers to be very careful. Nobody's gonna get it to the month and the date and the hour, but they tend to be in the ballpark, and they will tell you, are you older than your chronological age?

Speaker 1 (09:07): What role do financial professionals play in advising their clients about these tests? 'cause obviously we're talking about the medical field. So how does that cross into financial planning?

Speaker 2 (09:17): First and foremost, I would not advise a financial planner or advisor to, you know, Google something, and suddenly become an expert in the medical field. What you want to do though, if you're in the financial planning profession, is develop an awareness for this and be prepared for your clients to push back. At the very least, if you start using age too much, you know, if you start saying, well, you know, you're 67, you better be doing this, or, you know, you're 72. So, you know, RMDs, yes, there are certain rules that you have to follow that are based on chronological age. There's nothing you can do about it. You've got those RMDs, you're in your early seventies, but more and more people are gonna identify themselves with their biological age, not their chronological age. It'll be their identity and they'll get annoyed if you insist on using cookie cutter models for chronological ages when they've just gotten themselves tested and they're 15 years younger than their chronological age.

Speaker 2 (10:15): So at the very least, be prepared for them to mention this in conversation and you not to say, well, what is that? That has nothing to do with it. So that's number one. Number two, if you really wanna help someone devise a financial plan that's tailor made for them and not use these broad categories, you gotta get a better sense of what their biological age is. So you might even have to ask them, Hey, you know, I see here on your driver's license that you are 59. Do you happen to know what your biological age is? That's another way to use this.

Speaker 1 (10:48): That has to be a tough conversation for financial planners to have with their clients, I would assume, you know, talking about medical tests. But you're saying this is becoming more and more prevalent and they need to be up to date on what's happening in the trends out there. I

Speaker 2 (11:02): Actually think on the topic of conversations, it's a lot easier to discuss biological age versus health. You know, it's, it's so uncomfortable to ask someone, so have you had your first heart attack yet? I mean, that's a very unpleasant thing to ask or to even discuss health issues, especially when they walked in the door to discuss an annuity or to discuss a mutual fund. Whereas something like biological age sounds less, uh, threatening. It's sort of less ugly in terms of what the connotations are. And they might say, yeah, I know my biological age is much, much higher than chronological age. So it's a way to get at something that's important. Longevity, health, they're related in a way that's less threatening, I would say.

Speaker 1 (11:42): Yeah, it's important about messaging and how you craft what you're trying to say to your client. Uh, are there other ways to determine biological age besides these tests?

Speaker 2 (11:53): You know, there are tests that take a look at the strength of your grip that are correlated with biological age. You know, there are tests that simply look at, you know, the things that we normally do get on a treadmill run for 20 minutes and, and let's see what the heart rate looks like. Uh, there are questionnaires you, you can go online and Google biological age test and you know, there's 16 questions. Do you smoke? Are you overweight? What's your body mass index? How many times a week do you exercise? And lo and behold, at the end of the day, you get yourself a biological age. Is it accurate? Well, obviously it's not gonna be as accurate as the ones that are taking fluid, but it certainly gives you an indication of, am I way above my chronological age that's not good. Or am I way under my chronological age? And those are as cheap as a Google search.

Speaker 1 (12:37): What's the competitive advantage? Is there one for financial planners to work with their clients on determining biological age versus chronological age?

Speaker 2 (12:45): I think the competitive advantage is twofold. And I want to, you know, speak from experience. I think number one, I know that there are advisors that are starting to do this. There are firms that are actually offering this as part of their, you know, high net worth package. So, if your competitors are starting to do this, if your competitors, the people that you are going to lose clients to are doing this, you better get ahold of yourself and start to think about this as well. So that's a competitive disadvantage if you don't. I think another aspect of this is, you know, a lot of what financial advisors and planners talk about these days is starting to become repetitive. You know, you see the same sorts of conversations. They don't differentiate themselves, it sounds like stuff they heard from someone else. You talk to this advisor, they got the same pie charts with the same asset allocation, with the same, and you're like, what are you offering that's different from everyone else? This is the way to differentiate yourself.

Speaker 1 (13:39): You've talked frequently about the notion of outliving your money. In one interview you mention that while many people would've taken pains to make sure they had enough money to live comfortably at a hundred, it's possible that they would then find that circumstance beyond their control because of something like a weak market environment, which could put them in a pretty precarious financial situation. This is a concern for anyone, but maybe more so for someone who has just discovered they might have 10 or 15 more years to live than they'd expected, and therefore more years that they have to remain financially comfortable. How do they plan for that?

Speaker 2 (14:13): There are two different groups that reach retirement age. One group has more money than they will ever need to make it through the lifecycle. And that's not just that they're very, very wealthy, it's that they've developed modest needs and their nest egg is far greater than what they need, or their pension is far more than what they're going to need. So this is not geared towards them. The people I'm talking to are people that are looking at their nest egg and saying, it may last, it may not. If I only make it to 10 years and markets do very well, it'll last. But if I live 35 years and markets don't perform well, it will not last to them. I say, you might wanna consider protecting your nest egg, ensuring that if markets do do poorly and you live a very, very long time, you have income that lasts forever. And of course that brings us to the topic of annuities. Sure. Or the universe of annuities that can help you with that. Yeah.

Speaker 1 (15:07): So let's talk about annuities. Are they the best answer for this?

Speaker 2 (15:11): Well, they're certainly part of the answer and they must be included in any conversation. I think that at some point in every person's life, they have to ask themselves, should I have some annuity income? When should I buy that annuity? And just as importantly, when should I turn on the annuity? There's a large group out there that is not fortunate enough to have a defined benefit pension that's guaranteed for the rest of their life as long as they work, they are retiring from a 401k, a 403B, they have money in an IRA. They do not have lifetime income anywhere to them. I say it's time to think about what sort of income instrument, annuity instrument to, to put into your portfolio.

Speaker 1 (15:52): On that note, is there a specific type of annuity that financial professionals should be paying attention to in these circumstances?

Speaker 2 (15:59): I think that the word annuity is a very broad term and it's almost become meaningless. That's like saying the word fund. Hey, what do you think about funds? What kind of fund? A mutual fund, an exchange traded fund, a private equity fund, a venture capital fund, I mean the word fund. So the word annuity is sort of a beginning of a conversation. You can have variable annuities and fixed annuities, immediate annuities, indexed annuities, index linked annuities, lac longevity insured annuities. At the very least, you have to familiarize yourself with them. You've gotta take the time to understand the differences and understand what these different ones do you know, well, that kind of annuity has no upside potential. It's just guaranteed for life. That annuity, oh, only if you're really, really healthy. Do you want this one, this annuity? No, that's already duplicated in your portfolio insurance. So there isn't one particular one. There's this category of products and you gotta become familiar with them to figure out which one fits for which client.

Speaker 1 (16:54): We've been under the assumption it seems that, you know, many clients who have their biological age tested might find themselves to be younger than their driver's license as they are. That presents as one set of challenges, right? But how about the clients who find that their biological age is older, that the longevity they've been looking forward to might not be in the cards for them? What financial issues are they facing and how should they plan for it?

Speaker 2 (17:16): I would say that there are a whole host of things that you have to do differently in your retirement planning. I, I think that life insurance becomes a lot more important. Certainly, don't lapse that, that policy, don't surrender that policy. It's quite valuable. Your biologic age is very high. And uh, you know, life settlement companies and companies that deal with life insurance policies in the secondary market know this very well. They value policies based on what we would call biological age. I also think we talked about annuities a couple minutes ago. You know, if you have a test that is told you or your doctor, or you just know this, your biological age is way, way higher than your chronological age, I don't think you're a good candidate for a, you know, single premium income annuity or a qualified longevity annuity contract or a deferred income annuity.

Speaker 2 (18:02): You know, you're betting against a whole bunch of people that are much, much, much better health and younger than you. I don't think that's a good candidate. Maybe you should just consider the garden variety indexed annuities that don't have these bells and whistles and you know, embedded optionality 'cause they're not gonna be valuable to you. So my answer to your question is, if you are above the diagonal, which again means you're biological ages much higher or just higher than your chronological age, you've gotta think more in terms of things that pay out at death than at life.

Speaker 1 (18:32): So what we've seen is that not only is biological age testing available, but it's likely to become even more common, more easily accessible and more frequently used by financial professionals and their clients. But at present, it's still kind of a radical concept that isn't yet accepted by government officials, actuaries, and others who continue to consider every 75-year-old to be a 75-year-old. So how do we get past that? What policy changes might be necessary?

Speaker 2 (19:00): Yeah, I don't think any policy changes are gonna take place until people simply stop looking at chronological age as the age that matters. But I'll tell you some things that might accelerate that. If Apple's next watch tests you every day for your biological age and wakes you up in the morning with, Hey, not bad, you're 43 today, when I'm really 55 and every single day I get told my biological age is much younger than my chronological age. And more and more people are aware in those sorts of devices. The wearable technology, you'll see people associate themselves with biological age and they will demand that the rules around pension claiming be focused on biological age versus chronological age. That's number one. I think if you have influencers out there, some of the trendsetters talking about this and using it in language, Hey, my biological age, as the baby boomers continue to age, they're fighting aging and whatever they can, and this might be one way to do it, stop calling me a senior.

Speaker 2 (19:59): My biological age said that I'm 52. As all of this hits, then obviously the legislation's gonna have to change. People will not view chronological age as meaningful compliance departments and broker dealers and RIAs worldwide will suddenly realize that asking someone how old you are doesn't carry the same magnitude of impact as, Hey, do you know what your biological age is? All of that is what's gonna lead to governments changing. And I think actuaries have known this for years. I mean, insurance actuaries use different languages for the, they talk about age setbacks. Oh, no, no, no, this person really isn't 50. We're setting their age back because we know they're in great health. So they're 40, so they use a different language, but it will happen once the public wakes up to the fact, this isn't my age, stop calling me a 62-year-old.

Speaker 1 (20:48): Interesting that you think it's technology driven, which, which would make sense. What's your best advice both to financial professionals who are looking to do right by their clients and clients who are looking to maximize their longevity?

Speaker 2 (21:01): I think that, you know, the answer to that is twofold. I think that first of all, you have to be cognizant of your client's true age, and you have to give age specific advice enough with this birthdays thing, you know, let, let's get a better sense. I think at a deeper level, it's understanding longevity, uncertainty, the dispersion about how long we live, and the fact that, you know, spending 4% versus 3% versus 5%, that's not the solution to longevity. You have to think in terms of products that are gonna help, not in terms of spending rates. You know, I have a leak in the basement or water's leaking from the faucet. Having a faucet go from 4% to 2% so that we have less water come. That doesn't solve your problem. You gotta go deep into the plumbing and figure out what are some of the instruments out there that'll help you deal with longevity, uncertainty. And this of course, brings us back to the topic of annuities, including some sort of annuity instrument in your mix, we'll help you deal with longevity uncertainty.

Speaker 1 (21:59): Moshe, thank you so much for your time. A really fascinating conversation here. If anyone wants to check out Moshe's book, longevity Insurance for a biological age, you can check it out where he goes into more detail on this. Thank you so much for your time. Thank you. And to our listeners, be sure to subscribe, rate and review Your Thriving Practice on your favorite podcasting app. Until next time, I'm Jenn Bernstein. Thanks for listening.

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