Investors need to account for improved longevity
When do you plan to die? Weird question, right? It’s one that financial advisers have to ask their clients. The typical approach to retirement planning involves spending down the portfolio, a lifetime of savings for a client, at a rate that will ensure they have enough to live on now and for the rest of their life. The hard part is knowing how many years a person has left.
If risk is defined as the potential of making a mistake, I believe the most significant risk facing investors and their retirement is judgment about their life expectancy or longevity. Live too long, and you’re liable to run out. Die young? Well, you can see the problem with this. It’s a variable that few people like to discuss, so it gets tossed to the back burner with a “let’s just say 85 and go from there” type answer. Ask a client how long they’ll live, and nine times out of 10 they say they will die at the same age their parents did.
The problem with this approach is advancements in health care, education and technology. I think most Americans significantly and consistently underestimate their life expectancies. Much of this is because of the increased rate at which people are living longer.
Life expectancy is increasing because of innovations in vaccines and antibiotics; they have indeed caused our health to be significantly better. Cases of pandemic flu today are solved in a matter of weeks or months, yet just 100 years ago pandemic flus wiped out millions. Tuberculosis and polio were common in the early lives of today’s 70-yearolds. Today they are nonexistent. Knee, hip, and shoulder replacements are common, as are cataract corrections and heart stents, enabling people with worn-out parts to lead active lives free of what used to be life-limiting pain.
When baby boomers consider their life expectancy, they are using a measuring stick for someone who was born in the 1930s, expecting continuing improvements in health care. But advancements in the past 30 years have been exponentially greater. This creates a significant gap between the estimates of how long retirees will live, and how long they actually live. More concerning is the combination of a couple in retirement, and their joint life expectancy. It’s like taking the same issue and multiplying it by two.
Data reveals couples live longer than single people. This may be attributed to caring for one another, socialization and plain old love. Living for another gives purpose to your day. Rarely do people plan for and consider the life expectancy of a couple. In all actuality, the issue becomes even greater than the sum of its parts.
Education is also a significant factor in determining life expectancy. Today, the vast majority of our population is well educated. Educated people have higher incomes and are more active, eat better and are more in tune with their health. If education is the trump card to longevity, today’s Americans may break out way ahead in life expectancies.
Underestimating your longevity is a significant risk and can become a large financial problem especially for those planning to retire in the next 20 years. Pension plans cover the life of the individual, but as those plans are replaced with independent retirement savings, will retirees be prepared? Social Security may provide a base of income, yet it escalates at an anemic rate (only 2 percent this year, 0.3 percent in 2017 and none in 2016) and inflation has historically risen at 3 percent per year. This means the purchasing power of your Social Security income falls in half in just 35 years. Live 10 more years, say from 85 to 95, and you might see another 35 percent reduction in your purchasing power.
According to a study released this month from The Senior Citizens League, the reduction in the buying power of Social Security benefits from 2000-2018 was 34 percent.
Some of the largest cost increases during this period were medical related: Medicare Part V monthly premiums (195 percent), prescription drugs (188 percent), Medigap (158 percent) and medical out-of-pocket expenses (117 percent).
Living longer is a goal to which we should all aspire. With advances in modern health care and technology, the goal seems more attainable than ever. As such, we need to start accounting and planning for longer lives and the effect it may have on your retirement. Your investments should support you at all stages of life, whether that’s 65 or 105, especially when going back to work is no longer an option. If you haven’t already, talk with your financial adviser to discuss your longevity plan so your money doesn’t run out before you do.
Steve Booren is the founder of Prosperion Financial Advisors in Greenwood Village. Opinions are for general information and not intended to be specific advice or recommendations.