Have a seat at our virtual roundtable for a discussion of how portfolios can work harder for a population that’s living longer.
It’s one thing to plan for retirement, but quite another to plan for what comes next. Some financial tables and calculators may not include the possibility that you could live to be 100. No matter what your age now, planning is key, of course. But let’s drill down on some questions you may not be thinking about with some of today’s important financial thinkers.
Dara Luber is TD Ameritrade’s Senior Manager, Retirement. Christine Benz is Morningstar Inc.’s Director of Personal Finance, and John Bowblis is a Health Economics professor at Miami University in Ohio, and a research fellow with the Scripps Gerontology Center. Kevin Lund is Editor of TD Ameritrade’s thinkMoney ® Magazine, and Rachel Koning Beals edits this newsletter.
Rachel Koning Beals
Does most retirement planning address outliving your assets? Are healthcare and assisted-living costs primary concerns? Are there others?
John Bowblis — Over half of people 65 and older will need a nursing home, and the chance of needing home-health care or assisted living is even higher. This risk rises with age, and these expenses can increase the chance of outliving assets. Medicaid is an option, but this limits quality and choice.
Christine Benz — Health care and long-term costs are two of the biggest risk factors for outliving a nest egg. Other factors can also derail a retiree’s financial plan: loaning money to children, encountering a bear market as you hit retirement or overspending early in retirement. While it’s easy to say, “I lived on $80,000 a year, but I’ll need $60,000 a year when I retire,” it’s impossible to predict with any level of precision. That’s why contingency planning is helpful. Retirees don’t know if their money needs to last 10 or 30 years. Insurance products such as long-term care and longevity insurance (i.e. fixed-deferred annuities) can help hedge risk.
Dara Luber — When investors think of retirement-planning health like personal health, they stay on top of any changes. Consider retirement “checkups” from five to 10 years before retirement that focus on lifestyle, budget, resources and investments. Retirement planning should already include the important questions of when to start collecting Social Security benefits and whether individuals will work—full-time or part-time—past the point at which they’re eligible to collect Social Security and pension benefits. With the longevity conundrum, the to-work-or-not-to-work question will only become more significant.
Are portfolios keeping up with a rapidly changing landscape? What strategies can help?
Dara — Investors should begin positioning retirement portfolios well in advance of their actual retirement date in order to protect against the possibility of retiring during a down market. Additionally, investors should consider adding income solutions to their portfolios.
Christine — Although the specific allocation to stocks will vary based on the individual’s asset level and risk tolerance, among other factors, many target-date funds geared toward people who are already retired have at least 30% of their assets in stocks. At today’s ultra-low interest rates, “safe” investments such as CDs and high-quality, short-term bonds may not be so safe.
Another concern is inflation, which over longer-time horizons, can have a corrosive effect. Retirees have a greater share of their portfolios in fixed-rate investments such as bonds and CDs, and they’re usually getting a cost-of-living adjustment on a portion of their earnings—the Social Security piece. Some years, they don’t even get that. It’s important to include portfolio inflation hedges such as Treasury Inflation Protected securities, stocks, maybe a dash of commodities or precious metals, which, over the very long term can often out-earn inflation. A total position of 5% or 6% in commodities is plenty for most investors at all life stages and investors don’t have to invest directly in the futures markets. Instead, they can opt for exchange-traded funds (ETFs) and notes.
Kevin — Overall, stocks are becoming less influential on portfolio returns for some investors. Today, thanks to the proliferation of exchange-traded funds (ETFs), the greater awareness of, and access to the futures and forex markets, the average investor has greater access to commodities such as gold or oil, or currencies that no longer require specialized separate accounts. Keep in mind if investors consider less traditional investments, they also need to get familiar with new types, sometimes even new degrees, of risk.
As baby boomers and their children enter their 80s, 90s, and even 100s, what are their health needs? Are there trends to help us see the future?
John — Baby boomers face chronic medical conditions such as arthritis, heart disease, dementia, diabetes, obesity and eye disorders. More than three out of four people over 65 have at least two chronic medical conditions. Nearly half of people over 85 could develop dementia. Diabetes is growing fastest among those 75 and older. For persons with some physical limitations but no chronic conditions, the cost of health care is around $3,000 a year. Costs average over $16,500 for five or more conditions.
The good news is boomers are generally healthier than their parents at retirement, and many ailments can be postponed or avoided with a healthy lifestyle.
Kevin — I think what we’re talking about here is not just living longer, but living “well” physically and financially. It’s easier today to make relatively simple portfolio changes when investors consider a range of strategies. Even basic stock accounts can provide the research tools to help investors decide on and implement a strategy consistent with goals and risk profile that allows investors to worry less about outliving their assets and get down to the business of living.