Americans are living longer, with more of them reaching the grand old age of 100.
According to a 2014 report from the U.S. Centers for Disease Control and Prevention, 72,197 Americans hit the century mark (or already had). That was a 44 percent rise in the number of U.S. centenarians in 2000, where 50,281 U.S. citizens were 100 and older.
Study data also showed that the number of Americans living past 100 will continue to rise, thanks primarily to advancements in medicine and public health sanitation efforts. Also, new vaccines are curbing diseases (like pneumonia) that killed people in previous decades.
This presents both an opportunity and a challenge to investment advisors, who can steer more of their marketing efforts to older clients. But they also need to recalibrate conventional retirement models to accommodate the rising number of clients who will live to 100.
Some forward-thinking advisors have already started thinking about – and strategizing – retirement plans for the centenarian set. What are they thinking and where are they going, portfolio management-wise? Here’s a snapshot:
Tips From the Pros
David Twibell, president of Custom Portfolio Group in Denver: “The traditional approach to building a retirement portfolio is to gradually reduce a retiree’s equity exposure and add to their less-volatile bond exposure,” Twibell said. “Over time, this reduces their overall portfolio risk and provides additional income to fund any shortfall they have between their Social Security or pension income and their expenses.”
But that approach won’t work very well for a plan designed to last until someone reaches 100 years old, though, since it doesn’t do a very good job of keeping pace with inflation.
“For a plan created with the intent of funding someone’s retirement for several decades, you generally need to include a higher percentage of equities and fewer bonds,” Twibell added. “Obviously there’s no magic number since a lot of this depends on the retiree’s net worth, other sources of income, and expected future expenses, but it’s almost certain this type of plan will have more risk and volatility.”
That’s somewhat counter-intuitive for many retirees who think that once they retire they should abruptly shift gears into a very conservative investment strategy, Twibell said.
“While that may make sense depending on their financial situation and risk preferences, for most retirees planning to live to 100, their portfolio may not look a lot different than when they were working.”
Mike Laubinger, vice president at Victoria Capital Management in Charleston, S.C.: “Studies have shown that a diversified portfolio of common stocks makes the most sense to achieve that 100-year-old goal,” he said. “That’s because, after 15 years, the probability of loss on the initial investment drops to zero, the mean return on that portfolio is expected to be in the neighborhood of 8 percent. The risk in such a diversified portfolio is with short-term volatility.”
Ellen Hoffman, financial advisor with FTB Advisors and First Tennessee Bank: Although life expectancy in the U.S. has dropped a bit, it’s true that life expectancy for older Americans has still grown, due in part to a reduction in mortality at older ages.
Yet according to Hoffman, many people have misconceptions about how the long-term industry has evolved, and even more importantly, how they should be preparing for long-term care.
“Don’t wait until you’re 60,” Hoffman said. “You need to prepare early, as waiting could put you in a position of outliving stockpiled money, draining the savings to pay for late medical care and potentially dipping into any inheritance set aside for family.”
Also, if you wait you could risk developing a condition that makes you uninsurable. It’s best to pay up-front for long-term health care.
“Premiums could increase, if you choose to spread out your payments,” Hoffman said. “For those in their 50s who’ve been able to save enough money, paying a lump sum (usually $50,000-$100,000) will put them in the best position to take advantage of a long-term care policy.”
Ryan Krueger, president of Krueger & Catalano Capital Partners in Houston: “The entire focus of our little shop is to craft every single plan to minimum age of 100 or we agree not to work with each other,” Krueger said. “Unfortunately, none of the ‘withdrawal rate’ discussion, even at the highest levels, even considers ‘until age 100’ portfolio models.”
There are very few income planning specialists anywhere in the investment industry, he added.
“The entire focus is on asset accumulation and then retention of those assets or else the math of management fees doesn’t work,” he said. “Consequently, the structure works against a potential retiree and the fact that the average age for advisors reveals they are about to retire themselves.”
The best way for advisors to answer the “until age 100” challenge is to back into the income number that can get you there, Krueger said.
“In other words, no forward projections or average rates of return should be used if you want to securely answer the question ‘What is my 100-year-old annual income number?’” he said. “In order to retire with genuine peace of mind, that answer is not an asset number that fluctuates. It must be expressed in an annual income number to the age of 100.”
Pamela Yellen, two-time New York Times best-selling financial book author: “It isn’t necessary to risk your money to grow a sizable nest egg, even to age 100,” Yellen said.
Life insurance is an asset that’s grown in value every single year for more than 160 years, she noted, including during the Great Depression, as well as during every period of economic boom and bust.
“Hundreds of thousands of folks have bypassed Wall Street and achieved true financial security for life using a supercharged variation of dividend-paying whole life insurance,” Yellen said.
Brian O’Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC’s Guide to Creating Wealth. He’s a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at firstname.lastname@example.org.
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