The good reason you’ll need more in your 401(k)
Did you know that in 2017, Parisian doctors pioneered gene therapy to successfully reverse a teenager’s sickle cell anemia? Or that American researchers may have discovered how to detect pancreatic cancer, the thirdmost-fatal cancer before it metastasizes? These and other 2017 breakthroughs change your financial retirement planning.
When talking to folks about investments, my first question usually is: What is the primary purpose for your money? Usually, they respond with, “To take care of me and my spouse for the rest of our lives.” So I ask: How long do you both expect to live? Overwhelmingly people underestimate. So I ask how long their parents and grandparents lived (if they died of old age). Then we average and add actuarial tables to add a few more years. Due to medical advances, that “few more years” keeps rising ever fast.
When I was 25, I bought a smallterm life insurance policy. I wasn’t wealthy. A term life policy made sense — to provide for my wife and sons, just in case. But by building my firm I became wealthy enough to conclude that policy was pointless. So I let it lapse and forgot it. Decades passed. In my 50s, I found the file, old paperwork and all. Curious, I found their calculation of how long they had expected me to live past 50. For fun, I solicited the same insurer for an identical policy for a 25year old. Guess what? The life expectancy for a 25-year-old who successfully reached age 50 had become fully seven years longer. An extra year for every 3.5 years lived.
Today, according to the Centers for Disease Control and Prevention, an average 65-year old should live 19 more years. Yet in those years, we will get more “extra” years thanks to future medical advances. 2017 isn’t unique. Medical technology is moving faster.
Creative technologists keep devising new medical solutions like popcorn. Researchers have invented a process to revive frozen organs — a potential game-changer for transplant patients. Others are testing artificial intelligence’s use in everything from mammography to expanding researchers’ data sets far beyond clinical studies. Lots won’t succeed. Many likely are overhyped. But history suggests enough will prove fruitful to extend life expectancies.
Your investing must plan for these and future medical breakthroughs. Most people mistakenly think their time horizon ends at retirement. They expect their 401(k)s should get “conservative” when they retire — and focus on income. But that isn’t conservative. It’s risky. If you’re 50 today, and your grandparents averaged about 80 and your parents reach their late 80s, you’ll likely hit 100. Don’t run out of money in your later years. It’s brutally ugly! Getting 2% bond returns for decades won’t cut it. You need more.
Few fathom this, but over long stretches, stocks are far less risky than bonds. Higher historical returns, with less long-term variability. Over rolling
20-year periods since 1926, stocks beat bonds 71 of 73 times. Stocks’ average total return? 841% vs. 241% for bonds. The two times bonds beat stocks, it was by a hair’s whisker. Stocks still averaged 239%. Over rolling 30-year periods, stocks won every time, averaging 2,417%.
According to Fidelity, the ranks of
401(k) millionaires keep hitting highs. But even that, amortized, in all bonds renders a relatively minimalistic 30year retirement. If you have got a smaller 401(k), you must build it bigger or suffer. Even at age 65. Even well past retirement.