Spokane Journal of Business

Longer life span underscores need for financial reassessment

Target-date model may come up short as couples live longer

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Michael J. Maehl is a Spokane-based senior vice president of Opus 111 Group, a Seattle-based financial services company. He can be reached at 509.944.1790.

Long-term risk. This refers to the ongoing challenge we always have as investors.

It’s not what most folks like to hear, but understanding and accepting that there is no way you can control the markets—or your investments—is a linchpin of all long-term investing. We all want to invest such that our assets will support us appropriately as long as we’re perpendicular and taking nourishment. And this is the main point.

Have you considered how long that will be—either individually or as a couple? As Olivia Mitchell, a University of Pennsylvania professor, put it: “The chance you might live a very long time in retirement and run out of money is something we haven’t focused enough on at all.”

I feel that one of the most important variables in retirement income and wealth planning, and the one folks least understand, is their longevity.

The survey data I’ve seen indicate that we consistently underestimate our own life expectancies, primarily because life expectancy has been increasing faster than people realize. But it’s particularly a challenge when talking about the concept of joint life expectancy.

When I talk to a couple about this subject, each typically thinks only in terms of their own life expectancy. It’s only human. Most are unaware that the life expectancy of a couple considered together is importantly greater than that of either person. Married folks tend to live longer than do singles.

This uptrend in Americans’ longevity has been rising at about a 45-degree angle since about 1840 and continues to do so. Each year, new babies are living about three months longer than those born the previous year. Each decade, new babies live 2 1/2 years longer. And science is only now beginning to work on extending the life spans of older humans.

The implications of all this are of critical importance inasmuch as they upend all of the “conventional wisdom” regarding your asset allocation in retirement portfolios. For years, and due to experiences during the Great Depression, the so-called wisdom had it that, in your few remaining sunset years, it becomes absolutely important to secure your principal, so you must switch from stocks to bonds for “safety.” An investment we don’t use with our clients, the target-date mutual fund, is based on this fatal premise to your buying power.

Back then, folks usually didn’t live much past their actual retirement—even if they made it that far. So, it made sense to play it really cozy with those funds. Unfortunately, it’s been my experience that this flawed thinking has been passed along through families as gospel, with most people still following it.

Your increasing longevity suggests—maybe even requires—that you to take the exact opposite approach. As the length of time you'll need to have a rising and inflation-offsetting income increases, the more bonds become relatively more “risky” and stocks become relatively more “safe.”

Here’s an example: A couple who retires at 60, with the second death occurring at 95, can experience a near-tripling of their living costs. Holding a portfolio of primarily debt securities, which has no growth of principal or income, is a way to ensure the failure of your strategy.

However, and you can check the record, there is no 30-year period in American financial history in which cash dividends from common stocks have failed to offset consumer inflation. Further, since at least 1960, those dividends have grown at nearly twice the consumer price index inflation rate.

Once you define true long-term safety in terms of maintaining your purchasing power, you may want to create a mantra for your retirement portfolio something like this: bonds, risky—stocks, safe.

Another point about stocks in longer retirement portfolios is that your principal rises too. The stock market has historically been up about 70% of the time since 1926. Basically, the longer your time horizon, the less likely you are to suffer a principal loss.

This relentlessly increasing longevity is anything but a simple talking point. It’s the central variable in your financial lives.

For the record, I’m not advocating that you go all in on stock. A well-balanced, properly asset-allocated portfolio is essential. Bonds, to some extent, can offset stock moves. Using annuities of different types can also help provide predictable cash flow through your joint lives. I do suggest that high-quality dividend growth stocks be considered for a good chunk of the money you had allocated into bonds.

By the way, you can google your longevity risk with online longevity illustrators maintained by the American Academy of Actuaries and the Society of Actuaries. The information is based on the latest mortality data from the Social Security Administration.

Michael J. Maehl is a Spokane-based senior vice president of Opus 111 Group, a Seattle-based financial services company. He can be reached at 509.944.1790.

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