The Longevity Conundrum: Could Your Retirement Savings Last You to 120?
Posted on Sep 5, 2013 in Mortgage Market Updates and News
By Matt Brownell
Medical science hasn't conquered death, but it's making some progress.
The number of centenarians has increased by 66 percent in the last 30 years. The Census Bureau projects that 400,000 Americans will be over the age of 100 by 2050. And advances in medical science mean that lifespans of 120 -- and beyond -- are within reach.
But not everyone is thrilled with our increased longevity. A recent survey by Pew Research found that 83 percent of Americans put their "ideal lifespan" at 100 years or less, and just 4 percent said they'd actually want to live to 120. It's possible to live longer and longer, but so far, the vast majority of Americans just aren't that interested in sticking around more than a century.
While much of that has to do with concerns over the quality of life beyond 100, there are also real financial concerns at play: No one wants to outlive their money, and living forever loses its luster when you realize that you're going to be spending the last years of your life struggling to make ends meet.
"Parents have a real desire to leave a nest egg to their children when they pass," says Christopher Hickey, a financial planner for Merrill Lynch. "But if I live to 100, someone's taking me in."
In other words, the difference between living to 85 and living to 105 may be the difference between leaving your kids a nice inheritance and becoming a burden on them. So as medical advances extend the human lifespan ever longer, we have to ask: How do you plan for a retirement that could last as long or longer than you spent working?
Less Saving, More Living
It's a question that many financial planners are taking seriously.
A recent ad campaign by Prudential looked at some of the challenges posed by longer lifespans, with one billboard that read, "The first person to live to 150 is alive today." And concerns over longer lifespans are compounded by the fact that we have less retirement savings to rely upon.
"Look at what's going on with the traditional three-legged stool -- Social Security, pension plans and personal savings," says Prudential vice president Robert Fishbein. Social Security, he says, is due for adjustments that will likely decrease benefits to retirees.
Personal savings rates aren't what they used to be. And far fewer people have pensions these days, as companies have moved from defined benefit plans to 401(k)s.
"And then you throw in the fact we're living longer, and you see why this is the central dilemma," he adds.
Michael Tucker, a professor of finance at Fairfield University who has studied optimal retirement strategies, says that living into your 100s simply requires more retirement savings than most people have.
"If you're going to retire at 65 and live to 120, you need a lot of money," he says. "It's really not feasible to live in retirement for 50 years unless you have $5 million."
So if you don't have $5 million at retirement, how can you prepare for an extended lifespan? There are a few solutions, but fair warning: None of them are particularly good.
One is to simply put off retirement. It stands to reason that if we're able to live longer, we'll also be able to work longer. That probably doesn't mean working full time into your 80s, but it might mean working part time or doing consultant work to supplement your retirement income.
Another strategy is one that might give pause to older Americans, considering that it runs counter to the decades-old accepted wisdom -- continuing to grow your nest egg by staying heavily invested in the stock market even into your golden years.
That's a controversial notion. It's generally accepted that you want to transition your portfolio away from equities as you approach retirement age. The idea is that the closer you are to retirement, the less time you have to recover from a market downturn. Most advisers will suggest that you get less into stocks and more into bonds at that point. But that simple calculus goes out the window if you think there's a real possibility of outliving your money.
"You have to take higher risks," says Tucker. "60/40 is the rule, typically -- 60 percent stocks, 40 percent bonds. But if you're going to live that much longer, you'll run out of money." He suggest a portfolio closer to 80/20 or even 90/10.
Of course, there isn't a one-size-fits-all approach when it comes to determining your asset allocation, and leaving 80 percent of your nest egg in the stock market during retirement is something that most advisers will counsel you to avoid at all costs.
"An individual's pension and Social Security benefit will definitely affect what portions of their monies get allocated to equities," says Hickey. "When I'm planning for someone, I want to make sure we have all the bare necessities covered by a guaranteed income."
(Hickey also worries about how stressful it would be to have so much of your money in the stock market when you're retired. "Grandma doesn't get any sleep and dies of a heart attack because she watches CNBC," he quips. "Nobody wants that.")
Indeed, maintaining a riskier portfolio is far from a perfect solution: If you have a 40-year-long retirement, it's inevitable that you'll see your portfolio get burned by at least one downturn. But if living past 100 becomes the norm, you might not have a choice.
So here's the plan for beating the longevity curse: Save more. Spend less. Retire later. Plan for the worst. And most of all, accept that you have to take risks with your retirement money if you want it to last.
But that's not a foolproof strategy, and it's one that a lot of retirees won't follow, anyway. So in the not-so-distant future, we could see a lot of centenarians bemoaning their "good luck" as they watch their retirement savings dwindle with each passing year.
Tucker makes a blunt prediction: "Suicide will be very popular."
Matt Brownell is the consumer and retail reporter for DailyFinance. You can reach him at Matt.Brownell@teamaol.com, and follow him on Twitter at @Brownellorama.