“Let’s play old guys versus young guys,” I said to the group. I always like to watch the younger guys’ eyes light up when I utter this phrase on the basketball court. Their faces betray their thoughts, as it becomes immediately clear that they believe the game is in the bag for them.
Recently, one young guy looked at me and asked, “How do I know which side to be on?”
I looked at him and said, “My man, I’m 41 years old. You are definitely with the young guys.”
This story is funny to me because I remember being the “young” guy on the court playing against the much “older” guys. Didn’t they realize they were all washed up? What were they thinking by coming out and trying to compete with the young guys?
My, how the tables have turned. I’m now on the other side of that equation, but I can still remember those days as if they were only a moment ago. Twenty years went by in a blink.
I promise I’m not having a mid-life crisis. It’s way more interesting than that. As a financial advisor, I have the unique position of conversing with people in various life stages.
At our firm Vertex Capital Advisors, one of our primary areas of focus is retirement planning. To me, having a focus on retirement planning requires an understanding of longevity and the role it can play in a client’s life. Longevity is a unique problem for retirement planning because it is often an unknown variable with very significant implications. In many ways, longevity in retirement can be a risk multiplier—amplifying the risks of healthcare costs, inflation, and running out of money.
One of the main challenges that we face is that we don’t have a great blueprint for retirement in the US. I was raised to think about life as a series of stages:
As I was growing up, this is the rough blueprint that I always had in my mind. We go to school and work hard so that we can get a good job. We work hard at that job so that we can climb the corporate ladder, and we put money away for rainy days and retirement. When we are 65, we turn in our notice to our employer, activate Medicare & Social Security benefits, and turn on our retirement planning strategies.
I believe this is the mental map that many Americans have when it comes to lifespan and eventually our retirement years. This map, however, is changing right before our very eyes, and the blueprint that many of us grew up with has become outdated.
Thinking Differently About Retirement Futures
In my view, here is a more accurate version of what this map looks like today:
Life expectancy in our country has taken a major leap forward. But, that’s not all. You see, life expectancy is a term that is used frequently, but it can be measured in many different ways. When it comes to human life expectancy in the US, we often discuss average life expectancy, which measures everyone from birth to death. Averages, however, may not give us the full picture.
For instance, we know that averages can be skewed by unusually small or large numbers. For instance, if you have a one million dollar portfolio and I have zero dollars, the average portfolio between the two of us is $500,000. You and I know that those numbers are bogus, but you get the idea.
If you are thinking about your retirement years, it may be more useful to think about life expectancy from a specific starting point other than birth. The good news? Social Security is working on these numbers for us:
Americans’ life expectancy has been increasing for a number of reasons, including improvements in living standards and medical care. Overall life expectancy at age 65 increased from 17.2 years in 1990 (that is, for the 1925 birth cohort) to 17.9 years in 2000, 19.1 years in 2010, and 19.5 years in 2018 (for the 1953 birth cohort). Both men and women experienced this trend. Men’s life expectancy at age 65 increased from 15.1 years in 1990 to 16.3 years in 2000, 17.7 years in 2010, and 18.1 years in 2018. Women experienced similar increases, respectively from 18.9 years to 19.2, 20.3, and 20.7 years (National Center for Health Statistics 1994, Table 6-3; Arias 2002, Table 11; Arias 2014, Table A; Xu and others 2020, Figure 1). You can view the research at the SSA website here.
In addition to life expectancy, there are a few other factors that we should consider as investors. Those factors are education status, income level, and the idea of being healthy for longer. Retirement planning should be unique to you and your situation.
To try and simplify things a bit, I’ll lump education and income levels together. Without going into an extensive study, can we agree that there tends to be a correlation with higher education and earnings potential? Isn’t that the whole point of college and post graduate studies?
My point here is that there seems to be a pretty strong correlation between people with higher incomes and longer life expectancies. Social Security comes to our rescue (again) as they have a graph that breaks it down:
*SSA provides more than one way to make these calculations. This graph is for illustrative purposes only.
It seems quite clear that the more education and wealth you possess, the more likely you are to experience longer life expectancy. Here’s the rub— we aren’t just living longer. We are also experiencing more “life” in those later years, as many older adults remain quite active.
In my own family, we have Mamaw, who is 96 years old. She and her brother, Uncle Pete, are both in their 90s. Mamaw was still cutting her own grass well into her late 80s. It’s amazing to me.
What Can You Do?
Our firm now has the pleasure of working with multiple generations, but I think that increased longevity needs to be looked at from several angles. As we tell clients, “Financial Planning is a Process.” Thus, I don’t expect all of these ideas of mine to apply in every situation.
I also understand the frustrations of reading about a potential challenge, yet the author posits no possible solutions. (Here are 3 Conversations You Can Have Right Now) I don’t consider this a comprehensive list, as that would become very granular and require elaborate layers of context. But, here goes…
We need to think differently about jobs and careers.
My dad worked almost his entire adult life at one company. He retired, got the pension, and the gold watch. That scenario for millions of Americans is now extinct.
Workers today should evaluate their desired career path and plan to be flexible. In the wake of the COVID pandemic, we are beginning to see a massive shift with workers. Desires for more flexible work hours, working from home, and higher wages are all part of the landscape for employers these days.
In addition, many companies are now exploring and implementing equity-based compensation to recruit talent. Is this because employers have suddenly become benevolent? I doubt it. Instead, I think the market forces are shaping compensation in ways that allow employers to be more competitive.
I think the corporate world may be changed forever. For instance, I have a close friend who recently left a “career” position with a large corporation to simply have a “job.” He took a reasonable pay cut, but his stress levels plummeted. Could we see more workers doing the same?
I can imagine a world where people may move in and out of high stress positions, taking some breaks in between the stressful corporate jobs to decompress and enjoy more work/life balance. From a financial life planning standpoint, workers should plan their budgets accordingly. Make sure you have enough margin so you can take some time away or transition to a lower paying job.
Retirement Planning Age Should Be Flexible
Many folks that I speak with think of retirement age as being somewhere between 62 and 65 years old. What a coincidence that those ages align perfectly with eligibility for Social Security benefits (62) and Medicare (65). The social insurance system in the US has anchored us to those ages.
If we know we are going to live longer, we have to strongly evaluate the possibility that we may spend 25 to 30 years in retirement. What does that look like? With a time horizon that long, you should expect retirement to have phases of its own.
Consider a phased retirement. I know many, many workers who have worked and saved for decades; and they are ready for a break. Some have fully funded retirement income plans, and they are eagerly awaiting a date circled on the calendar. Others may be more concerned about running out of money, but they are struggling with the high stress and changing corporate climate.
A phased retirement may allow some workers to transition into retirement more slowly. They may be able to work part-time or simply pursue something else that brings more fulfillment to their lives. Sometimes, having a few years of additional income can be a game changer for retirement income strategies because it allows you to defer taking social security benefits or delay tapping your retirement nest egg.
Rethink Your Investment Time Horizon
This topic likely deserves its own stand-alone discourse, so I’ll try and keep my thoughts somewhat brief. People that are on the cusp of retirement have likely lived through some scary market scenarios. Thus, it’s considered prudent to become more conservative as your retirement date approaches, as a significant market downturn could derail your retirement plans.
Retirement is a different season for everyone, but a big aspect of retirement planning that requires attention is your portfolio’s asset allocation. Asset location is also quite important if you have non-qualified retirement assets or ROTH IRA accounts. But, let’s not muddy the waters. Tax planning is highly specific to each household.
Asset allocation–the timeless words etched in stone inside of an infinite number of sentences about investments. My concern is that retirees have to find a way to balance a conservative leaning for their early retirement years and a need for long-term real asset growth to offset inflation.
Market volatility to the downside is no fun. However, as Charlie Biliello writes, volatility is the price of admission. In Charlie’s article, he posted this graphic:
This is just the movements he compiled since 2009. I remember many of these time periods, and many of them were clouded by horrific headlines and uncertainty. Charlie does an excellent job of highlighting this in his post. Read it.
My point to retirement investors is that we should consider retaining some of that spartan mindset that we encourage our younger investors–our wealth builders– to have. When you have a potential 30-year retirement ahead, we need to allocate assets accordingly.
I strongly recommend that investors always have a growth allocation, even in their retirement years. Yes, this may mean that we have to endure some challenging times. The longer our time horizon–the more we can allow time to be on our side. Time can be our enemy or our friend.
Health Is An Asset
As we get older, this idea becomes more intuitive. Our bodies age and begin to ache. We learn about a friend or family member’s bad diagnosis. Being healthy and having quality of life come into focus more and more as we age. Retirement planning conversations should include discussion on health and quality of life.
My encouragement to everyone is to begin considering investments in your health just like you think about investing in your retirement or brokerage accounts. Don’t just think about today–this about the future.
The health habits you have and form today may be with you for the rest of your life. Consider the food you eat, the amount of sleep you get, and the exercise (or lack of) you are getting. These habits can compound for you or against you.
With the cost of healthcare and health services on the rise, choosing healthy habits may indeed be a financially savvy move. The quality of life and enjoyment of good health are even more of an incentive.
I am slowly realizing that 41-year-old me can no longer consume calories like the 25-year-old me. I am incorporating yoga into my life (something I never thought I’d say out loud). I’m also looking more into high quality supplements and tracking my sleep each night.
No, I’m not becoming obsessive. I just realize now that I have a family that depends on me. You may be in the same boat. You may have people that depend on you–emotionally and financially. We owe it to ourselves and to them to do what we can to be at our best.
Stewardship is often used as a term when discussing financial matters. I think it also applies to our health. If we don’t take charge of our health and become good stewards of our minds and bodies, who will?
Remember– this could be (and hopefully will be) a much longer race. Longevity trends are changing, and we need to prepare and think differently when it comes to lifespan. Retirement planning may simply be the beginning of the next 30 years.