AI’s impact on longevity risk: Can clients afford it?

Key Takeaways:

· AI is poised to help us live longer, healthier lives.

· This makes helping clients plan for longevity risk even more critical.

· Strategies like purchasing annuities, delaying Social Security benefits, adding long-term care insurance, and skewing toward long-term investments can help to mitigate the risk.

You’ve likely heard a lot about the impact of artificial intelligence (AI). AI and other wealth-tech applications may help you more quickly deliver better data, enhanced insights, improved communication and more—while helping you boost efficiency and serve more clients.

But there’s something else you may not have considered—the impact AI could have on the health of your clients as they age. Although the full benefits of AI in health care are just beginning to be realized, it’s becoming clearer that AI could help us live longer, healthier lives. While that’s great news, it could also put many of your clients at a higher risk of outliving their savings.

How AI can lengthen lives

Health care experts increasingly expect AI to be used throughout the health care system. It can help improve the quality, speed, and availability of everything from medical training and research to wellness and disease prevention, early detection and diagnosis, decision-making, and treatment.

At a June 2023 conference of the American Society of Echocardiography, for instance, several studies showed how AI could help to look for and diagnose heart disease. In one study, AI helped novice nurses and medical residents acquire diagnostic-quality echocardiography images from a handheld device—a potentially life-saving tool for patients in communities or facilities without echocardiography specialists.¹

Another study used AI to significantly improve the diagnosis of aortic stenosis (a type of heart valve disease). The AI tool allowed for faster and better diagnosis of this common, life-threatening condition—enabling more timely treatment and preventing future incidents of heart failure.²

Why living longer is (really) expensive

Your clients may not fully grasp the effect that a longer life—even if it’s a mostly healthy one—can have on their financial security in retirement. But it’s tough to overstate the impact. Sharing this information, along with personalized projections, may help them understand the financial consequences.

• More years of travel, hobbies and living expenses. As AI not only lengthens lives but improves health, your clients will have more (and more active) years ahead of them. That means additional years of expenses not only for housing, groceries and the like but also for travel, restaurants, hobbies, and other activities they enjoy.
• Higher lifetime medical expenses. In a recent Milliman study, a healthy 65-year-old male who retired in 2022 is projected to spend approximately $264,000 on health care expenses during his retirement—based on a lifespan of 88 years. Since the study projected women to live just two years longer, to age 90, their estimated health care costs during retirement rose to $300,000.³ Now imagine those life spans increasing to 95 or even longer.
• Higher long-term care costs. Whether it’s in-home care, assisted living, or nursing care, costs for long-term care will only increase. The yearly cost of part-time in-home care, for instance, is projected to almost double over 20 years—from a national average of $32,642 in 2023 to nearly $60,000 by 4043. At the other end of the spectrum, annual nursing home costs will likely rise from $107,000 in 2023 to more than $218,000 by 2043.⁴

How to manage increased longevity risk

How can you help clients plan for longer, more active lives? There are several strategies you can consider recommending to clients.

1. Implement lifetime income products

Lifetime income products, such as annuities, can help your clients establish a steady stream of income, either throughout their retirement years or to fill an income gap for a specific time period. When selecting these products, be sure to plan for the increasing costs of health care over a client’s 30+ years of retirement.

2. Encourage phased or delayed retirement

As the landscape shifts toward longer lifespans, some clients may need to reconsider the timing of a traditional, full retirement. Encouraging clients to adopt a phased retirement approach—or delaying retirement entirely for even a few years—can go a long way toward stretching their retirement funds.

In fact, using a phased retirement approach—by working part-time in their current career or to pursue a true passion— could help your clients partially retire years before a traditional, full-time retirement approach.

3. Delay filing for Social Security benefits

Social Security is one of the few sources of lifetime income that’s indexed to inflation, making social security plans an invaluable tool in the fight against longevity risk. The strategy here is simple but potentially powerful—delay claiming Social Security benefits as long as possible.

Ideally, clients should wait to claim benefits until age 70 to take full advantage of the 8%-per-year delayed retirement credits accumulated after one’s full retirement age. This delay can result in a considerably higher amount of total lifetime benefits from Social Security—especially for those who are married or who expect to live longer. Waiting also provides a larger income base for Social Security’s annual cost-of-living adjustment.

For some clients, delaying Social Security benefits may cause cash flow issues if they retire before their Social Security benefits begin. There are a few ways to help clients overcome this hurdle, including drawing first from tax-deferred accounts or purchasing a single-premium guaranteed annuity to provide income during the interim.

4. Focus on long-term investment vehicles

To accommodate for an extended lifespan, you may want to skew your portfolio toward growth-oriented investments. High quality dividend-paying stocks, for instance, offer the potential for long-term growth along with short-term income generation.

5. Maintain comprehensive health and long-term care coverage

Health care costs can rip through retirement savings in a hurry. Ensuring that your clients maintain comprehensive health insurance coverage is a critical and foundational part of Medicare planning. But understanding what costs to expect over an expanding lifetime may be something to consider.

Long-term care (LTC) insurance is another important option. Of course, the sooner LTC coverage is purchased, the lower the premiums. So, keep these policies in mind for all clients—not just those approaching retirement age.

6. Stick to sustainable withdrawal rates

Educate clients about the importance of maintaining a sustainable withdrawal rate during retirement. This may be a difficult conversation, as no one enjoys cutting back on their lifestyle. But working with clients to determine a withdrawal rate that maximizes their income while reducing the risk of exhausting their funds will help them (and maybe even you) sleep better at night.

7. Implement sequencing strategies

Withdrawal sequencing can have a profound impact on a client’s portfolio and tax burden. Clients who choose to delay Social Security benefits, for example, often have an income gap between the time they retire and the time their Social Security benefits begin. Determining from which accounts clients should withdraw first, second, and so on can not only help to extend portfolio life but also minimize taxation. For a deep dive into withdrawal sequencing strategies, see our white paper, “Withdrawal sequencing strategies that could enhance tax efficiency.”

Navigating longevity risk: A tough but critical task

Helping clients mitigate longevity risk has always been one of the biggest challenges faced by financial professionals with the potential for AI to significantly improve our health and lengthen our lives, there’s even more at stake as you and your clients prepare for a rapidly changing world.

This is where your guidance can make all the difference. Take the lead in explaining the concept of longevity risk, the financial implications of increased life expectancy and the necessity of building a robust financial plan that caters to this new reality. With your help, your clients can look forward to a future that doesn’t just last longer but is also more secure, more fulfilling, and better protected from financial worries.