As if there weren’t enough things to worry about these days, according to an article published in Nature on October 5, 2016, the human lifespan may extend to 115 years. Now imagine being sentenced to a possible 50-year retirement. The authors, Xiao Dong, Brandon Miholland, and Jan Vijg submit that human life expectancy has improved dramatically and there may be a limit to such improvement. Their hypothesis is that nature won’t allow humans to live much beyond 115 years.
“So far the longest-lived person made it to 122 years, Jeanne Calment, a Frenchwoman who quit smoking at 117. No one has ever been documented to live as long. Calment died in 1997,” reports The Street on October 6, 2016. My first observation is listening to our clients who are resolute in their almost unanimous belief that they couldn’t possibly live any longer than their parents. It gets more interesting when, in spite of their habits, they often do live longer than they ever imagined. Former Vanguard Chief Investment Officer Gus Sauter in late September, 2016 agrees, “I think people dramatically underestimate their life spans.” As The Street noted, “If human beings can and do live to 115, that may change the calculus for how to invest.”
I don’t know about you, but needing to plan for a 50-year retirement instead of a 20-year retirement changes everything. Again. But something is happening here. There were 72,197 Americans who were 100 years old or older in 2014, which is an increase of 44% since 2000 according the Centers for Disease Control, reports InvestmentNews. If you begin working at age 22 after graduating college, your traditional career would span 43 years. Which also means you would have needed to save for those 43 years to support the next 50 years in retirement. At a conference in Vancouver the first week of September, 2015, Harry Dent suggested that since longevity is the wild card the new retirement age should be 75 instead of 65.
Let’s start with the bad news. Sauter said, Stocks are highly valued now, which means they likely will revert to their mean performance, which means likely worse performance in future years. “Returns will be much lower than we’ve seen historically, and people should prepare for that,” Sauter went on to say. Beginning in 2017, Baby Boomers who were told not to trust anyone over 30 will turn 71, which means Required Minimum Distributions must begin on all of that retirement money. If you have been following along here you know that every year the IRS increases the withdrawal amount retirees must take from their retirement funds and 100% of those withdrawals are taxed. Now, let’s say there’s a -45% loss to your account on top of the 5% distribution you needed to take as income, so now the account is down -50%. Suddenly you need 100% just to get back to even, assuming you don’t take another withdrawal. If that loss is too severe as you are taking income every year, the chances of getting your account back to where it was may become as likely as meeting that man in the moon.
The 4% withdrawal speed limit is simply a guideline. Investors need to review their account balances as well as their withdrawal needs instead of trying to set it and forget it. A friend of mine shared with me privately that he and his wife, both well into their 70’s, just woke up to the harsh reality that they need to reduce their spending by $4,000 a month to avoid running out of money before they run out of time. Then there’s inflation with which to contend. As Investopedia cited on October 26, 2016, “Using the rule of 72, a 3% rate of inflation would mean that a retiree’s purchasing power would be cut in half over a 24-year span. So that cut would happen twice during a 50-year span of retirement. Such a long life expectancy has implications for withdrawal strategies from retirement accounts, investing strategies, and a whole slew of other issues.” Certainly lifetime income streams from pensions, annuities, and Social Security will become increasingly valuable.
Let’s plan that in spite of your habits, you’re going to live to 100. This is more conservative than conventional wisdom. By contrast, imagine planning on living and spending until 78, only to discover you’re still here at 80 and the money is gone. According to a survey of 348 financial advisors by InvestmentNews, on average they were using a life expectancy of 91 for men and 94 for women. Per the CDC, the current life expectances of 84 for men and 87 for women who reach age 65. For those who reach 75 year old, the life expectancies increase to 88 for women and 86 for men. Now for those who joke you’ll become a Walmart greeter, I say think again. I know someone who moved back to Missouri after being laid off at Schlumberger. She was convinced she could be just fine working at Walmart for a while, only to discover she was “over-qualified” and therefore not able to get the job.
Allow me to repeat myself. It’s not about the prediction of what may or may not happen, it’s all about the preparation for the good, the bad, and the unforeseen. You may have seen Mark Cuban on CNBC, November 1, 2016 when he said he had already “put on the biggest hedge I’ve ever put on against all my equities and interest bearing bonds.” The question I want you to answer for yourself is what hedge(s) might you put in place while you can?
To help manage increasing longevity, financial advisors are suggesting the following steps, according to InvestmentNews and Investopedia:
· Deferring Social Security benefits was recommended by 65% of the advisors surveyed.
· Planning for increased healthcare spending in retirement: 59%.
· Suggesting lower withdrawal rates from nest egg: 54%.
· Offering more retirement-focused products: 45%.
· Suggesting clients take more investment risk: 44%.
· Put clients on a more restricted budget: 22%.
· Advocate less investment risk: 9%.
· No change in their retirement advice: 9% of advisors.
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