My wife Darlene and I joined a group of friends to see some of our favorite performers at Desert Trip (otherwise known as “Old-Chella”). Most Desert Trip stories highlighted the political statement from Roger Waters in the closing act of the festival: launching an inflatable pig painted with Donald Trump’s face into the audience! Although the inflatable pig was memorable, the performances of Waters, Mick Jagger, Keith Richards, Pete Townshend, Sir Paul McCartney and Bob Dylan – all over 70 years old — left a deeper impression. The performances reminded me that arbitrary notions about aging may be off-target.
I left the festival rethinking conventional wisdom about managing money for clients who are nearing or are already in retirement.
Changing Expectations on Longevity
Studies of life expectancy in the U.S. support the observation that people are leading longer, more active lives. Women who reach age 65 have an average life expectancy of 86; men who reach age 65 have an average life expectancy of 84. One in four 65 year-olds can expect to live past 90, one in ten past 95. Approximately half of 65 year-old couples can expect one spouse to live to age 90; about one in five couples can expect one spouse to live to age 95.
An important consideration for advisors who work with affluent families: affluent individuals have significantly longer life expectancies! Advances in medicine, technology and education may provide a disproportionate benefit to well-off individuals, changing longevity expectations as well as the nature of life in retirement. Given advances in medicine, many retirees are continuing to work, travel and exercise vigorously deeper into retirement than was the case in prior decades.
Darlene and I visited my sister and her husband on our way to Desert Trip. One of our relatives passed away at the age of 113 earlier in the year. At least everyone thought she was 113 – according to my sister the family discovered that she was actually 115 years old and had been adjusting her age downward for years!
Centenarians are becoming more common, and by 2050 an estimated 400,000 people in the U.S. will be over the age of 100. The implication of longer and healthier lives is far-reaching, as planning for 15 years of retirement is very different than planning for 30 years (or more) of retirement. Our relative had 50 years of a reasonably active life after reaching age 65.
The Investment Implications
Investment growth and inflation protection becomes critical for a generation that expects to live longer and lead a more active post-retirement life.
Retirees can expect rising health care expenses to be a primary consideration that must be addressed within their investment portfolio. The “100 minus age” rule of thumb is often commonly used to determine how much of a portfolio should be invested in equities. A 65 year-old following the rule would invest 35% in equities, which for many investors may not provide the growth or inflation protection necessary to sustain resources through their expected lifespan.
Rules can be a good starting point for discussion, but shouldn’t be followed blindly.
I managed target date funds for a major financial institution earlier in my career, and remember debates about how aggressively to reduce equity investments in the years approaching retirement and in the early years of retirement. The Global Financial Crisis cast a heavy shadow on our discussions, given the challenges faced by investors nearing retirement who saw their retirement accounts fall dramatically in 2008 and early 2009.
The risk of a downturn in the market as clients approach retirement is an important consideration, but equally important is the need to address the risk of outliving resources.
Maintaining a cash reserve equal to at least one year of expenses can provide a buffer that reduces the need to be a forced seller if there are investment shortfalls in the early years of retirement. Budgeting is a related consideration, as well-prepared retirees distinguish between their required and desired spending budget, and leave themselves room to adjust their lifestyle spending during lean investment years.
Investors that have an adequate cash cushion and budget flexibility will be better equipped to weather the near-term investment volatility associated with higher allocations to equities.
Investments in retirement should include enough equities to provide growth to last 30 or more years. Dividend-oriented stocks are commonly used to provide a combination of growth and income, as well as some degree of inflation protection. TIPs, infrastructure investments and health care stocks are also used by investors seeking inflation protection in retirement.
That’s Not All
The investment portfolio is only one element to a plan for a long and happy retirement. Long-term care and medical coverage are other important components, as are estate plans for clients with more complex financial considerations. In an ideal world, financial goals, personal preferences and estate plans are prepared and shared with family members and advisors long before cognitive decline impairs decision-making.
See these additional Dan Kern articles on ThinkAdvisor: