As the retirement concept has changed, Thornburg Investments created an informational packet for advisors to help clients reshape their retirement expectations.
Instead of looking at retirement as a single event, the packet focuses on the longevity aspect of retirement, with resources to help plan for health and longer life spans, longevity-oriented portfolios and sustainable spending.
Longevity-oriented portfolios are different from a target-date approach, according to Jan Holman, director of advisor education at Thornburg and author of the packet.
“There are a lot of pistons working at the same time: generating income, working with investments that you believe have the potential to increase income over time and potentially appreciate in price,” she told ThinkAdvisor on Tuesday.
Thornburg recommends investors maintain a cash flow reserve account that can cover two years’ worth of expenses and an investment portfolio that is approximately 25% fixed income investments and 65% equities, Holman said. “Between the cash flow, the fixed income and equity, you have 100%. The money funnels from the longer-term investments into the cash flow reserve and that account would give the client a check each month.”
That mix of investments works with investors of any age, Holman said. “In a short-term, highly liquid investment, you have two years’ worth of expenses, so you’re taking out of the equation the potential of needing to sell equity investments during a tough market environment,” she explained. “That’s really the most significant consideration for why people want to lighten up on equities. And I’m not talking about growth, growth, growth stuff; I’m talking about dividend-paying, high-quality global stocks. Two years in the short-term, highly liquid account gives a person a buffer, so they’re not having to liquidate in the middle of a downturn.”
Another important aspect of longevity planning is, of course, health. Unfortunately, it’s a topic that has usually been an afterthought when it comes to planning for retirement.
“Many folks in the industry focus on the investment stuff. More and more people are starting to talk about long-term care and that type of stuff, but the investment part doesn’t really matter if a person doesn’t pay attention to their health,” she said.
She described a situation her uncle experienced: “If you ask someone who’s got a lot of money and they’re sick, how has that wealth helped them, they’ll say it doesn’t really matter without health. Because we’ve been so obsessed with and focused on the numbers and the retirement date and all that, we haven’t taken into consideration, many of us, the fact that we need to be managing our own health.”
Holman referred to research from the Stanford Institute on Longevity that identified the “big three” health problems Americans will face as dementia and Alzheimer’s, arthritis and obesity. “We’re already dealing with them now, but they’re just going to keep on exploding,” Holman said. “Do we have as individuals some control, or can we influence whether or not we get one of those diseases? I believe on obesity, yes we can, but it has to be very conscious. Somebody has to decide, ‘OK, I’ve accumulated this wealth. Now if I’m 100 pounds overweight a lot of this money might go toward things that have to deal with me trying to ward off the effects of obesity.’”
For advisors, that also means they need to open discussions about long-term care, too, Holman said. “It doesn’t necessarily matter what the advisor’s opinion is on whether or not long-term care makes sense. From a quality of advice standpoint, they are in a position where they have to present it to clients as an option.”
She added that they should also consider in their conversations with clients “any people who would be financially or emotionally responsible for that client. If the client, for example, says, ‘Oh, I don’t need long-term care,’ a son or a daughter who might be responsible emotionally for the parent if something happened may say, ‘I’ll pay the premium for you.’ It becomes a multi-generational discussion.”
Another topic touched on in the packet is wisdom, according to Holman.
“For a lot of advisors, it’s a really tough thing to get their arms around,” Holman said. “Wisdom is one of those things that we gather with age. As we live longer, we have deeper amounts of wisdom. If we’re making the trade-off between youth and aging, what are we getting in return? I believe we get wisdom.”
That means after they stop working, older people still contribute to their communities. “They can be very active in philanthropy. They can mentor people in their family, which is a huge benefit in longevity,” Holman said. “There are multiple generations of a family alive at once as opposed to when I grew up when I knew my grandparents for a couple of years then they were gone. There were never great grandparents around.”
Holman stressed that as people age, they have to make a conscious decision about how they will live their lives. “I know that for myself, when I turned 40 I started asking, ‘What is this all about?’ I have three kids and I noticed that I was focusing a lot on their lives and what they were doing and that type of thing, but it wasn’t lost to me that, oh by the way, I had a life too, and I needed to make sure that the way I was spending it was aligned with what I wanted my life to be about,” she said.
Holman also pointed to a new trend in the packet: philanthropreneurs. “I didn’t coin that phrase,” Holman said, but “those are entrepreneurial philanthropists—people who take their knowledge and make a difference in the world while making a profit. They identify a cause or a business that relates to something they know a lot about or a life passion and become active in it. That business itself gives back to whatever the cause is.”
It might help to reframe retirement as the beginning of a new stage, not the end of an old one, Holman suggested. “The problem is if you look at the word ‘retirement,’ just the word itself is so end-related,” she concluded. “It’s like a brick wall or something. I understand why we in the industry have been obsessed with this because it was something we could touch. In an intangible business, we could say, ‘Well, here’s a retirement date and here’s all these things that you can do.’ The problem is a retirement date shouldn’t be any different in terms of how I look at my life from graduating from high school or college.”
Check out How Much Do Your Clients Really Need to Work? on ThinkAdvisor.