The good news: People are healthier and living longer than ever. The bad news: Their portfolios need some first aid.

Get ready for the silver tsunami.

Thanks to healthier living and advances in medicine, the average American is now living a record 78.2 years. Every year, in fact, we’re adding another few months to that average. Compare that to just 50 years ago, when Americans could expect to live about 10 years less.

Great news, right? Yes, but with an asterisk. The shift in how long we can expect to live means we need to throw out some of our most basic financial assumptions. Many Americans, for instance, might set up their investments expecting to live 10 or 15 years in retirement. But if that number becomes 20 or even 30 years, you’ve just blown up your carefully planned portfolio. Live long enough and you’ll likely face every retiree’s worst nightmare: You’ll run out of money.

“People underestimate the chances of living to their life expectancy, so they tend not to understand how much it will cost to live in retirement,” says Olivia Mitchell, a risk management professor at the University of Pennsylvania’s Wharton School. “Few people really ‘get’ longevity risk. For instance, women have a one-third chance of living to 90, and a good many of us will live to 100. So even planning for life expectancy isn’t a safe bet. We should be planning to live much longer than that.”

Put that way, the prospect of a long and healthy life can seem almost upsetting—to your finances, anyway. But the situation isn’t irreparable. It just means tweaking your portfolio based on today’s realities, rather than outdated assumptions and statistics from decades ago. Because if current longevity trends continue, according to one Danish study, half of the babies born today in developed countries can expect to live to 100. Gulp.

Stay in stocks

That’s why investors like Barry Maher are taking pre-emptive action today, rather than taking the risk of outliving their savings tomorrow. Maher, a Helendale, Calif.-based motivational speaker and author of the popular business book Filling the Glass, is 62 and going strong with a full schedule. In past decades someone like him might be getting set to retire, but Maher knows he probably has many years of active living ahead of him.

In fact, it was after pouring over longevity statistics that Maher discovered he had to make big changes in his retirement dreams. “I had a kidney removed when I was younger, and always thought I might make it to 65 or 70,” he says. “Then I found out my life expectancy was the same as people with two kidneys, which is rising all the time. That meant my retirement plan had to change drastically.”

As a result Maher has kept his equity allocation relatively high, at 45% of his portfolio. The old rule of thumb is that your fixed-income percentage should equal your age, but if Maher’s funds have plenty of time to recover from any market downturn, then he’s willing to take on a little more risk.

It’s not the allocation Maher expected to have. He may also have to settle for a less lavish retirement lifestyle. But it’s better than reaching his 80s or 90s and realizing his savings have dwindled to nothing. “My mother’s still alive and kicking at 87, so I’m figuring on 90 just to be safe,” says Maher. “And I’m hoping for even longer than that.”

So what are hale and hearty investors to do, if they have new, more distant dates to work toward?

Experts say increased life expectancy could affect your choice of target-date retirement funds. The funds, which automatically shift your allocation as you get closer to retirement, now hold more than $254 billion in assets, according to the Investment Company Institute. But with a longer time horizon, you might want to keep your portion of stocks on the high side, since you’ll likely have time to recover from any market dips.

With stocks you’ll have the best shot at higher long-term returns compared with slow but steady bonds. Target-date investors may want to choose a fund with a target date that’s further away. 

Control withdrawals

Experts also say a conservative withdrawal rate will go a long ways toward coping with increased life expectancy.

“Spending rate will be a key determinant of asset longevity,” says Fidelity fund manager Chris Sharpe, who helps manage the family of Freedom funds. The Freedom Funds are designed to help your assets last through your statistical life expectancy and to allow you to spend about 5% to 6% of your assets a year, he notes.

For even more of a cushion, according to one famous Harvard University study, an initial withdrawal rate of 4% (the dollar figure is then adjusted for inflation every year) is conservative enough so you’ll never need to dig into your principal.

Maher, the California speaker and author, plans on coming in even below that, siphoning off well below 4% of his savings every year, and making that possible by taking on some part-time work well into his golden years. That strategy should be stingy enough so he’ll outlast his cash.

So-called managed-payout funds, another increasingly popular product on the market, demand a similarly conservative approach. By doling out regular checks, they’re designed to act much like an annuity, though without the insurance guarantee. Some funds, like Fidelity’s income replacement funds, are essentially target date funds—you pick the date you want the account to liquidate and collect a regular, predictable sum. Some other firms’ offer investors a choice of payouts (3%, 5% or 7%) that are ultimately dependent on how well your fund performs.

“Absolutely select the lowest payout” that you can live with, says Harold Evensky, founder of Coral Gables, Fla.-based financial planners Evensky & Katz Wealth Management and author of books like Retirement Income Redesigned. “That will increase your long-term probability of success.”

Keep working

Another way to confront longevity risk is simply to put off retirement. After all, lifespan-conscious investors may look at the stats and decide they want to work for a few more years anyway, rather than spend the next 30 years playing shuffleboard and ordering the Early Bird Special in an Arizona retirement enclave.

“The best strategy is to not retire if at all possible, and to defer it as long as possible if one must,” says Wharton’s Mitchell. That way you delay dipping into your savings, you enlarge your Social Security benefit or pension, if you have one, and you can save more to help pay your medical costs. “So save more, retire later, if you possibly can,” Mitchell says.

With life expectancies rising every year, Barry Maher is glad he’s taking pre-emptive action. He’s planning to work through his golden years, put off Social Security and is opting for Fidelity index funds to help him to the finish line.

“Thankfully I changed my plans early enough to make a real difference,” he says. “If I was only finding out now about my true age expectancy, it would have been much more of a challenge.”

	Loading...