Horizon's Pete Bush in Barron's on Longevity Risk

February 11, 2023

You Could Live to Be 100. The Trick in Not Running Out of Money.

Every day, Jordi Visser checks his heart rate. He also monitors his breathing, keeps tabs on how well he slept, and consumes a diet consisting largely of fruits and vegetables. Visser, 56, doesn’t do this because he is in ill health. Far from it. He has his eye on the future. His goal: a prosperous and active retirement that stretches for decades.

“We’re at the convergence of technology and longevity,” says Visser, chief investment officer at Weiss Multi-Strategy Advisers, an asset manager in New York City. Advances in medicine and technology over the coming decade may mean Americans have the ability to live not only longer lives but also healthier ones, he says.

“Tom Brady is a perfect example of something that wasn’t deemed possible,” Visser says.

Of course, Brady, who recently announced his retirement from football at the ripe old age of 45, is in a league of his own. But Visser’s point is clear: The rest of us mere mortals might need to rethink assumptions of what’s possible to achieve in our senior years, as well as our investment strategy. A potentially decadeslong retirement requires a portfolio built for the long haul. Likewise, controlling your expenses while still enjoying retirement could become a delicate balancing act.

Sticking With Stocks

Consider an old rule of thumb for retirement investing: Subtract your age from 100, and that’s the percentage you should have in equities. Under that rule, a 70-year-old should have 30% of his or her portfolio’s assets in stocks.

That rule seems hopelessly outdated when a healthy adult has a chance of living to 100. That 70-year-old needs to plan for 30 more years, which means staying invested in equities to generate the growth that can combat the impact of inflation.

Equities are the engine your portfolio needs in the long run, says Pete Bush, an advisor with Cetera Financial Group and co-founder of Horizon Financial Group in Baton Rouge, La.

“People tend to think, ‘Oh, I’m getting near retirement. I’d better play it safe.’ They are thinking to retirement, not through retirement,” he says.

Fact is, some 70-year-olds are as healthy as 50-year-olds. Given that, Visser suggests that investors take into account their biological age—essentially a measure of your health that may be very different than the number of candles on your birthday cake. Scientists are working on ways to accurately test for biological age. Some of the techniques, which include analyzing saliva and blood samples, may sound like science fiction. But Visser says there’s a basic takeaway for investors: “How healthy you are should impact how you think about your portfolio.”

Coming up with the right asset allocation is part of the puzzle. Bush says that investors should consider striking a balance between growth and value, noting that growth stocks performed well in the past decade but fared poorly last year. International equities could also be poised for better returns than U.S. stocks in the coming years, a sharp contrast with the sector’s performance over the past decade. That’s partially because European and Asian stocks tend to be cheaper compared with U.S. equities. Asset manager Vanguard projects higher 10-year annualized returns for non-U.S. developed markets, at 7.2% to 9.2%, than for U.S. markets, at 4.7% to 6.7%.

Especially now that interest rates are higher, bonds can play an important role for income and security, says Jeremy Altfeder, a financial advisor at Captrust. “Let’s say a client spends $100,000 in a year. So, we want a year’s worth of needs set aside. We may set aside $100,000 of Treasury bills.”

Altfeder says that investors can feel more comfortable knowing they have ample funds set aside, sometimes up to seven years’ worth, depending on the client. “It’s very predictable if you are laddering out Treasuries and other instruments,” he says. “You know what the bonds will yield if you are holding them to maturity.”

Many financial advisors also recommend sophisticated strategies involving alternative investments, trusts, and estate planning that might be appropriate depending on the wealth of the individual, his or her tax situation, desire to leave an estate to heirs or charity, and risk tolerance. The goal is to make that money last, sometimes into the next generation.

A New Take on the Work/Life Balance

The potential for a longer, healthier life creates additional incentives to work longer and to wait to file for Social Security to receive a bigger monthly benefit. Such moves can boost your savings and give your portfolio more time to grow before you begin withdrawing funds.

Investors who need to save more have two additional ways to get a leg up on retirement savings. First, the Internal Revenue Service’s updated contribution limits permit investors to contribute up to $22,500 to their 401(k), 403(b), and other retirement plans in 2023, an increase from $20,500. People age 50 and older can save an additional $7,500 above that limit. Investors planning for a long retirement will also benefit from new legislation that is phasing in an increase in the age for required minimum distributions, or RMDs, to 75 from 72.

Of course, you don’t have to stay in your current job or even work full-time. Chip Munn, an advisor and CEO of Signature Wealth Strategies in Florence, S.C., has helped clients find ways to restructure their work so they aren’t in a rush to retire. “Older workers have a lot of value and leverage,” he says. But there might not be formal programs at your company to accommodate your desired schedule, he says, “so you may have to go to your employer and say, ‘Hey, I don’t want to retire, but I’d like to work part time.’ ”

Plus, there are benefits to staying active. “The happiest and healthiest people work longer, but work less,” he says.

Early retirement can be riskier than you might think, even for those who calculate they have plenty of savings. Bank of America’s Cyndi Hutchins has seen that firsthand. Her grandmother retired at age 55 and had a 41-year retirement.

“That’s when I started thinking about retirement differently,” says Hutchins, director of financial gerontology in the bank’s retirement research and insights group. “We planned for a 10-, 15-year-long retirement. There were lots of things that we hadn’t considered. She had a pension, but it was a small pension, and to make it work over 41 years was quite difficult.” Ultimately, her family had to contribute to her grandmother’s living expenses.

From 1960 to 2015, life expectancy in the U.S. increased by almost 10 years, from 69.7 years to 79.4. It is projected to increase another 6.1 years from 2016 to 2060 to reach a record high of 85.6 years, according to a 2020 Census Bureau report. And Americans are increasingly living well beyond that. Nearly a fifth of the U.S. population is over age 65.

Unsurprisingly, given rising inflation and last year’s weak stock and bond markets, more people are afraid of running out of money in old age. This includes people who have saved a lot. More than a third of millionaires believe that “it will take a miracle” to achieve a secure retirement, according to a 2022 survey of high-net-worth investors conducted by Natixis Investment Managers.

Such anxiety is fueling a surge in the popularity of annuities, which are insurance contracts that can promise income for life. Frank Paré, the founder of PF Wealth Management, says he has considered using a single premium immediate annuity, or SPIA, as part of the retirement plan for some clients. With a SPIA, an investor pays a lump sum to an insurance company, which provides a regular stream of payments to the annuity owner that lasts a lifetime. The annuity’s payout depends on several factors, including the owner’s age and gender.

But there are a couple of caveats, Paré says. First, the fees may be substantial. Second, you still need to keep some retirement savings in stocks, bonds, and other assets. “You don’t want to leave yourself without enough liquidity outside the SPIA, in case you need it,” Paré says.

Inflation is another concern with annuities. “If you don’t have an inflation rider and inflation accelerates like it did last year, then your purchasing power will be jeopardized,” Paré says.

If you consider an annuity, just bear in mind that it is one potential tool in the toolbox. “I don’t believe in silver bullets,” Paré says.

Expense Management

In addition to maximizing income, retirees at all wealth levels need to keep tabs on their budget and avoid taking on major new expenses that require costly maintenance as they enter retirement, such as a vacation home or new boat.

Healthcare is likely the biggest-ticket item that retirees may underestimate—especially for healthy seniors who are lucky enough to live a very long time. A 2022 Fidelity Investments report found that a 65-year-old couple can expect to spend an average of $315,000 in medical expenses throughout retirement. That estimate was up 5% from 2021 and has nearly doubled from its original $160,000 in 2002, according to Fidelity, which is one the nation’s largest 401(k) providers.

Maintaining a healthy lifestyle can help keep those costs down in the first decade or two of retirement, but some things are simply out of our control. To help prepare for costly future medical bills, consider investing in a health savings account, which offers great tax advantages. “If you can contribute to an HSA and not use the money to pay for current healthcare expenses, then it’s a great way to save for long-term care,” says Bank of America’s Hutchins.

Deciding where you will live in retirement will, of course, have a big impact on expenses, so figure this out early. Some Americans choose to move to states with warmer weather and lower costs of living. If that’s you, take into account whether your new community will be able to fulfill your future medical needs, not just your hobbies.

Most Americans don’t move, or don’t move far, in retirement. Approximately three-quarters of adults age 50 and older want to stay in their current home for the long term, according to a 2021 AARP survey. “If you are healthy and active, it’s easy to stay in your current home,” says Hutchins. “As you get older, think about whether your home is age-friendly.” For example, if you don’t have a first-floor bathroom, then add the cost of that renovation to your financial plan, she says.

The Secret to Happiness

Perhaps most important, advisors and healthcare experts say the key factor for well-being in retirement is to keep an active social life. Get a hobby if you don’t already have one. Volunteer at a charity. Have dinner with friends.

That advice may sound corny, but there are significant benefits to your health. The Harvard Study of Adult Development, which has been tracking a group of adults and their descendants for 85 years and counting, has found that close personal connections are a key factor in longevity as well as physical and mental health.

“The fastest accelerant in symptoms of cognitive decline is isolation and loneliness,” says Bank of America’s Hutchins. “You have to make sure you can continue to socialize and that your physical and emotional needs can both be met.”

When planning for retirement, think about who you’ll have lunch with, says Joseph Coughlin, director of the MIT AgeLab. “That gets to not just how good is your investment portfolio, but also how good is your social portfolio? Do you have friends? If you’re moving in retirement, will you be able to find them? It takes time to make a good friend,” he says.

After all, if you are going to live to 100, you want to have close personal connections—and enough money so that you don’t have to worry.

Write to Andrew Welsch at andrew.welsch@barrons.com