Thought for the Week – Longevity Risk

retirement-exit-2The economy we have been experiencing since 2008 has seen historically low interest rates. It’s taken five years to recover what has been lost. We should be paying attention to some of the implications here since ignoring their impact on many of you and on me personally could be dramatic.

Think about it:

• We have an ageing Bull Market that is pushing the historical limits and looking at the next Bear.

• Clients and prospective clients are retiring and are looking for help to support a comfortable lifestyle.

• Clients no longer have the singular goal of building their wealth for future use. We’ve moved from working to earn money to making sure our money is working for us.

• Clients expect us to position their assets to provide income they won’t outlive, additional income when needed to help pay the increased cost-of-living when they become infirm; and pass a legacy to heirs who are facing an even more uncertain future and can use all the financial help they can get.

As investment advisors, we have historically faced one most significant risk….Market Risk. With diversification, asset allocation and intelligent strategies we’ve been able to help our clients overcome Market Risk and successfully build their wealth.

Today, however, there are many more risks that must be addressed. Consider, you have now retired and must live on the wealth you managed to create. Now you face Inflation Risk, Deflation Risk, Withdrawal Rate Risk, Sequence of Returns Risk, Long-term Care Risk, Regulatory Risk, Taxation Risk and the granddaddy of them all, Longevity Risk.

Longevity Risk… the risk of outliving our income. But that’s not all. The longer we live, the more opportunities for market losses, the greater the possibilities of running out of money, the more significant the Sequence of Return issue and the greater the likelihood of needing long-term care.

The most important strategy therefore is to remove the Longevity Risk from a retiree’s portfolio so that you can eliminate, or significantly reduce, most or all the rest. Now we can concentrate on continuing to help clients earn a respectable return on their investments.

Stock markets and other investment instruments are never expected to specifically address these issues. And many successful individuals will die poor when their investments are unable to meet all of their requirements in an environment of volatility and uncertainty. Only insurance companies are able to eliminate Longevity Risk. They can do this successfully because they also deal with Mortality Risk. They win when people with life insurance live a long time and they win when annuitants die too soon. Everything in the middle is just a calculated profit. No other investment or institution can do that.

Some clients have so much money they cannot possibly run out of money, even if it’s simply stuffed in a mattress. But most people need help to properly position their assets, take the Longevity Risk off the table and cover the extra cost needed when they require long-term care.

I’m not suggesting that investment portfolios should be replaced with insurance policies. But there is no doubt that retired clients will be better off when their portfolios include a guaranteed Pension Income floor that eliminates Longevity Risk. It’s an insurance strategy to increase income when needed to protect your portfolio from decimation due to excessive health care costs and even provide a more efficient and predictable solution for leaving a financial legacy.

Most planners like myself admit to modest knowledge of the insurance industry, its unique products and the many sophisticated strategies that can be employed to address these retirement-based concerns. But some of us continue to rely on the investment concepts we have used for years to grow assets. What is really needed are concepts for our retired clients so you can spend your money to maintain the best possible life style without running out of money before you die.

We want to help you take Longevity Risk off the table, increase the security and predictability of your retirement income, and reduce stress.

The idea behind this post comes from a colleague in southern California, Gene Pastula. Thanks Gene. Tony

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