The Risks of Living Longer

Perhaps the greatest “invention” of the 20th Century is longevity of life.  Had you been born in 1900, the typical life expectancy of an American male was only 47 years.  Granted, there was no Food & Drug Administration and no penicillin. People worked in dangerous jobs, were exposed to plague-like illnesses such as the Spanish Flu, and infant mortality rates were significantly higher than today.

When Social Security was enacted in the 1930’s, it seemed like a reasonable retirement income plan for the government – because you could not receive your benefit until you turned 65 . . . and hardly anyone lived that long!

Fast-forward to today, where people are routinely working into their 70’s and living well into their 80’s and beyond.  This, then, points out something that we, as financial planners, must consider when crafting strategies to help our clients – and that is “longevity risk.”

Previous generations had the perfect antidote for longevity risk – a pension plan provided by their employer.  This “income-for-life” model has gone the way of Blockbuster Video and the Edsel – most of the companies that used to offer a pension plan no longer do so . . . and it is not surprising because it just costs them too much money.  And, honestly, who knows what Social Security might look like 20 years from now?

But alternatives, such as the 401(k) plan, have not proven to be adequate replacements to a traditional pension.  For one thing, maximizing contributions can be challenging, especially given that workers today face increased basic living costs, exemplified by higher housing and health-care expenses.  Also, one study (by the MIT AgeLab)says that 35% of all student loans outstanding are held by people over the age of 40!

And, let’s not forget that, even in a short retirement of 20 years, it is reasonable for investors to expect to see two or three bear markets, increasing the risk of loss, especially for retirees who don’t have the benefit of professional investment management to help navigate down cycles.

Another result of living longer is the higher likelihood in marriages not lasting a lifetime.  In fact, the increasing rate of divorce for people age 50 and older can wreak havoc on even the most prudent retirement planning decisions – especially for those who find new spouses.  Think about it . . . someone in this situation must balance protecting assets for their new spouse as well as their existing heirs. And, if the new spouse is younger, the couple will likely need a larger asset base to offer a longer period of cash flow and portfolio longevity.

Plus, anyone getting a divorce loses the tax benefits that couples filing a joint return enjoy, in some cases increasing the tax rate for both divorcing spouses!

We can also be impacted by the fact that our parents are, themselves, enjoying a longer lifespan. This can have a very tangible effect on the transition of family wealth, delaying, or in some cases, depleting inheritances.

Then, we need to consider the extraordinarily high medical costs we could see at the end of our lives – especially should we need some kind of formal, institutional convalescent care, which, 20 years from now, will almost certainly cost more than $100,000 per year.

You enter retirement with a dollar figure in mind as to how much you hope to spend.  You tally up your “guaranteed” sources of income, such as Social Security and any pensions you may be entitled to.  Then you look to your investment portfolio to supply the difference.  And, this is where we have to be completely honest in our assessment and the realization that we may want to reduce current expenditures in order to provide a longevity safety net.

As a financial advisor, it is my responsibility to spot trends in my clients’ lives and to help them develop the strategies and solutions for managing the numerous risks that life can deliver – including longevity risk.  But, it is also my responsibility to be completely honest with those clients who have unrealistic expectations of what their portfolio can provide, and how long it will actually last.  After all, we’re not “miracle workers!”

Bottom line?  A keen eye on your finances, an honest view of your spending needs, along with an understanding that you could have a very long life is absolutely critical to your retirement success.