Life expectancy plays role in retirees' investment choices

Seth Wallace, BridgeTower Media Newswires

When it comes to investing and managing your wealth, there aren’t too many sure-thing, 100-percent, carve-it-in-stone predictions, even from the most adept of consultants.

There’s one big one, though, and it’s as uncomfortable to talk about as it is inevitable: Father Time, as the saying goes, is undefeated. We know our lives are going to end at some point. Luckily, however, that knowledge (along with higher reasoning and opposable thumbs) is what separates us from the other animals.

There’s more good news, too! Americans have never lived longer, according to the Centers for Disease Control and Prevention. A baby born in this country in 2006 will live, on average, more than 11 years longer than the same baby born in 1942.

Life expectancy, as a concept, seems pretty straightforward, but a closer look at the numbers reveals some interesting factors: a 65-year-old American today can expect to live another 18.4 years — that’s a decade longer than the same person’s life expectancy at birth would have predicted.

While this may seem slightly counterintuitive, it’s not that hard to interpret: the older you get, the more likely you are to live longer. An American woman at 75 can expect to make it to 87 (again, on average) while a 75-year-old man should have another 10.5 years left in him. This is the same reason there exists the misconception that people in the Dark Age only lived to their 30s or 40s — infant mortality was sky-high before the discovery of germ theory, inoculations or widespread proper nutrition and the number of children who died young was orders of magnitude higher than it is today. If Sir Galahad could stay alive long enough to start his own family, he had a good chance of retiring with enough time left to see his grandchildren take up arms for a regional feudal lord or join the local monastery. Plague and famine and Viking raiders notwithstanding, of course.

Likewise, not many of us count our assets in terms of vassals pledging fealty or herds of cattle. Our wealth is, thankfully, a little more liquid and with that comes endless decisions on how to best manage and plan for the future. People are living longer and they need to make their money last as long as their lives.

“Thirty or 40 years ago, when you retired at 65, you might live another 15 years and have a pension from Kodak that would support your spending,” said Jim Eckl, wealth planning services director for Rochester’s Cobblestone Capital Advisors. “Now, if you retire at 65, you might live another 30-plus years. The onus is now on the retiree for looking after their investments and planning to fund their lifestyle so they don’t run out.”

(For readers under 40, a pension is a regular payment made during a person’s retirement from an investment fund to which that person or their employer has contributed during their career. They can now be seen largely in museums.)

The widespread elimination of pension benefits has removed one of the “three legs of the stool” formerly employed as a retirement foundation by wealth managers across the profession. Savings/investments and Social Security benefits, the other two, now must bear the rest of the burden.

“In the 1970s and 1980s, between the three legs of the stool, a shorter life expectancy and readily available health insurance, people didn’t worry too much about outliving their money,” said Joe Votava, CEO and Founder of Seneca Financial Advisors. “Social Security goes up a little bit by inflation but health care costs have exploded.”

Health care is commonly cited as the top expense for retirees and as anyone with an aging parent or looking at options themselves knows, the bottom lines can be staggering. According to a recent Genworth Financial survey, a private nursing home room costs an average of more than $76,000 per year, or $200 per day. The average rate for a home health aide averages around $19 per hour.

“It’s become a real problem for both retirees and nonretirees,” said Eckl. “The costs of health care in general have skyrocketed.”

A combination of self-insurance and long-term care insurance can provide a safety net for medical needs that may otherwise torpedo your assets, both Eckl and Votava said, along with taking a long-term view towards investments.

When building a model for retirement (and not outliving your cash), Votava said it’s necessary to be more aggressive than previous generations.

“Historically, as people got older, they’d become more conservative in their investments with things like fixed income bonds and CDs, so you were sure you’d have your money and wouldn’t run out,” he said. “Now, if people get too conservative too soon, you might get to 90 and that won’t last you.”

One way to forestall your retirement savings running out is increasingly popular. According to the American Association of Retired People, in February 2019 more than 20 percent of adults over the age of 65 were either working or looking for work, compared with 10 percent in 1985.

With the notion of “traditional retirement age” now seeming outdated, investors today can’t afford to take the safer tack.

“People tend to realize, ‘I can’t just avoid the equity markets in retirement, I still need to grow my assets,’” Eckl said. “If you can save twice as much, that’s clearly better, but most people don’t have the capacity to do that.”

Instead of that steady, safe 3 or 4 percent return on bonds, investors need to “take a little more risk” in order to get to a 6 or 7 percent return, “which you’re going to need to be able to fund your living expenses,” Votava said.

In addition to the classic stocks, bonds and cash, Eckl said a myriad of newer asset classes such as real estate investment trusts (REITs), debt funds, private investments and exchange-traded funds (ETFs) can provide attractive options. The best tools only work when wielded by a steady hand, however.

“Take an asset allocation that will allow you to reach what goal you’ve set but also is an allocation you can be comfortable with,” Eckl said. “You don’t want to have a knee-jerk reaction if you invest in a certain way and we hit a recession and the market has a drawdown – that’s not the time to jump out of the market.”

The key to managing your investments and wealth in the face of increased life expectancy, both experts agreed, is to both know your limits and capacity and be willing to sacrifice a little bit now for the bigger payoff later.

“Yes, there will be recessions and times your portfolio will decline in value but you want that to be upfront and comfortable and not forced to sell assets at the wrong moment,” Eckl said. “If you have the ability to take on some illiquidity where you don’t need the money for the next five years, that can provide better returns than the public market and fits into the wide breadth of arrangements and types of investments that retirees need.”


Seth Wallace is a Rochester-area freelance writer.