Longevity Risk and Retirement

My grandmother just had her 105 birthday! She has now been in the decumulation phase of retirement for over 45 years. Back when she retired in 1970, $1 of buying power had the same purchasing power as $6.11 today.  As she has aged, her investment goals have changed from focusing on total returns to maintaining a comfortable lifestyle in retirement.

The most difficult part of planning for retirement is that you never know how long you will live. There is a gentle balance between controlling your spending or facing a budget shortfall. My grandmother never thought she would live to be 105. Over time, her risks changed as the quality of her life changed.

In the 1970’s, her major investment risks included out of control inflation and a bear market. In 1983, tax laws also changed when Social Security was taxed. An increase in her longevity also gave her more of a chance of potentially facing a significant financial crisis. This commentary is too short to list all of the 20% market drops that she has experienced.

A major disadvantage for retirees today, is investing in a low interest rate environment. It is much more difficult to retire with a high income portfolio of investments that can help maintain a high standard of living during retirement. More retirees have been forced to invest with a focus on total returns. Those that have not saved enough for retirement or hold too much cash, increase their odds of facing a budget shortfall.

As longevity increases, so does the probability that you will no longer be able to take care of yourself.  The cost of nursing home care is now significantly higher.  My grandmother had the benefit of lower nursing home care beginning in her 80’s.   Long-term care insurance premiums are now significantly higher than they were 5-10 years ago. Many insurance companies did such a poor job estimating coverage, that they no longer offer this type of insurance. Only a few companies now offer this insurance. The result is that many people can’t afford the premiums and will need to start saving more for retirement.

We all hope to face longevity risk. Preparing a retirement income plan is essential to minimizing this risk. Your plan needs to begin with a budget and include how this budget will change over time. Determining how to fund this budget in a low rate environment is your challenge. Those that prepare a plan earlier may have a better chance of living a comfortable lifestyle much like my grandmother has over her 45+ years in retirement.

If you would like to speak with me about building a diversified portfolio through customized portfolio management that aligns your risk tolerance with your financial goals, feel free to send an email to mitch@cgfadvisor.com.

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Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

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