What is Longevity Risk?
My Grandma Marina’s recent 90th birthday party reminded me of a financial risk that is not discussed enough: longevity risk. Longevity risk is the risk that you outlive your assets. The longer your live the greater your chance of becoming frail, being a target of elder abuse, needing long term care, and seeing inflation eat away at your purchasing power.
Marina’s mother was born in Venice and her father was born in Texas to Mexican Immigrants. She was the youngest of 13 and has outlived all of her siblings. She has outlived two of her three sons and has been a widow for 20 years. I can’t imagine that she ever thought she would live to 90 and be widowed for so many years.
I have spent some really nice time with both of my grandmas over the past six months. Here is a picture of Honey and Marina in 2015. Honey’s parents were both born in Italy and she is the only living child of seven. Neither Honey nor Marina feels safe driving anymore and they rely on family members and a paid helper to bring them groceries and to take them to their many doctor visits.
The last time we went to a restaurant I noticed that neither of them could read the menu. Someone once said that from 65 to 75 you are in the go-go years of retirement. 75 to 85 is the slow-go years. After 85 you enter the no-go years. Honey and Marina are definitely in the no-go years and wouldn’t accept a free trip to anywhere in the world because of pain from walking, the possibility of danger, and being away from their doctors.
The longer you live, the greater the chance that you will spend more on healthcare and need some sort of long term care. According to www.ownyourfuturetexas.org there is a 70% chance that someone 65 or older will need long term care and the average private room at a nursing home costs more than $67,000 per year. Older people also tend to get more and more conservative with their investments and run the risk that their savings will not keep up with inflation.
In my financial planning practice, I try to be conservative with my assumptions on returns knowing that a client in their 80s may not be willing to keep the 60% stock portfolio they started retirement with. I also usually run my retirement projections showing people living to 95 or 100, just in case.
What can you do to Minimize Longevity Risk?
If you are worried about longevity risk, consider working longer. 65 is just a stupid number that we need to quit anchoring to. It is not even considered full retirement age for Social Security anymore. Repeat after me, “I am not a loser if I work past 65.” Some of the most successful people in the world like Warren Buffet, Carl Icahn, and T. Boone Pickens are still working in their 80s. Working longer allows you to save more and reduces the number of years your portfolio will need to sustain you. It also has the added benefit of keeping you mentally sharp and feeling needed.
The second best thing to consider is taking Social Security later. If you die early and your payment is bigger than your spouse’s, he or she gets to take over your larger payment for the rest of their life. Don’t think about “my” Social Security. This is a joint life decision and an act of love. If your benefit is $1,000 at age 66, it will be $1,320 at age 70. If you die early, you didn’t have long to blow much money and your kids will still get an inheritance. The risk is small if you die early in retirement. You won’t remember how nice life was at 62 when you took Social Security early if you make it to 100 and don’t have two dimes to rub together.
You should also consider putting some of your money into either an immediate or a deferred annuity and taking payments for life. At the time of this writing a 65 year old woman can put $100,000 into an immediate annuity and get a monthly payment of $500 for the rest of her life, even if she lives to 120. Annuities are the only investments that have mortality credits and can guarantee you a payment for life.
Getting long term care insurance through traditional long term care or buying a life insurance policy with a good critical care rider can protect you from some of the expenses of long term care. If you don’t insure this risk, you should designate part of your portfolio or another asset like your home as your self-insured long term care plan.
Lastly, you are going to need to hold some allocation to stocks to try and beat inflation. When you buy a CD or a bond, you are a loaner and you hope to get interest payments and your principal back at maturity date. When you buy a diversified portfolio of stocks, you are an owner and get to participate in the future profits of the best companies on earth. Human progress in my Grandma’s lifetimes has been astonishing. I can’t imagine how much life will change over my lifetime with so many talented scientists all connected via the internet.
Nobody knows when they are going to die, but I recommend that you plan to live a long life because you never know what a biotech company in California is dreaming up to invent to keep you alive past 100.
Damon Gonzalez is the founder of Domestique Capital, located in Plano, Texas. He has been a CERTIFIED FINANCIAL PLANNER™ practitioner since 2004 and has extensive knowledge in investments, taxes, budgeting, and insurance. He obtained the Retirement Income Certified Professional Designation in 2015.