Retirement portfolios: Longevity changes everything

For some, the phrase “The Upside of Aging” may seem to be the ultimate oxymoron, especially those of us who see more of our life path in the rear-view mirror than up ahead. It happens to be the title of a book I’ve just started to read, yet another recommended by Mark Venning on his longevity site at changerangers.com.

The book, by Milken Institute president Paul Irving, examines how long lifetimes are changing the world of health, work, innovation, policy and purpose. The Milken Institute has focused on aging for several years and takes the long view that human ingenuity should never be underestimated.

In the foreword, Milken Institute chairman Michael Milken passes along the opinion by the late Nobel laureate Robert Fogel (of the University of Chicago) that “average life spans in the developed world will easily exceed 100 within the current century.” He expects some to reach 150. Another expert cited by Milken noted that “in terms of health, a 60-year-old woman is equivalent to a 40-year-old in 1960. Today’s 80-year-old American man is similar to a 60-year-old as recently as 1975.”

Your money may have to last a long time

And as Venning notes in the fourth installment of his blog devoted to the book, there’s also a huge impact for those likely to land on MoneySense and this Financial Independence blog. Venning observes that one of the major obsessions in the aging game is financial security. Despite the huge advantage we in the West have in enjoying access to various financial planning vehicles and advisers, “a vast majority of people have not planned well or saved aside enough for their later years.” It’s clear to me that the combination of long life, financial independence and robust health must constitute a gift; but what if long life coincides with poor health and/or insufficient wealth? Might not the blessing of long life then become a curse?

One of the multiple sources in the book is American financial planner Dan Houston of the Principal Financial Group. He sees financial security not just as involving saving for retirement, but also encompassing “comprehensive financial planning for competing demands … at different stages of life.”

Houston says longevity changes everything and it’s hard to disagree. Since I tend to look at the topic through the lens of financial independence, it’s clear to me that if nest eggs have to last longer than we and our advisers think, portfolios had better consider inflation. Inflation has always been a curse for those living on a fixed income or non-indexed pensions. The combination of minuscule interest rates and a long life seems to me an unpleasant combination. Stocks that raise their dividends regularly stand a greater chance of generating an inflation-beating source of income. Putting some of your fixed-income allocation into annuities also seems to be prudent, particularly if the pricing of annuities by insurance companies doesn’t fully reflect extensions in longevity.

Most of all, however, it seems to me that taking retirement too early in life may be a losing strategy in more ways than one. Putting aside the human need to connect with other people, to have structure and routine and to keep the little grey cells stimulated, purely at a financial level, it’s a lot to expect portfolios designed to last 20 years to support 30 or 40 years of “retirement.” Rather than attempting to retire earlier than the traditional age of 65, it may be more prudent to push it back closer to 70, at least on a part-time basis.

Better yet, consider taking the baseline financial independence provided by modest savings and pensions, and launching into an entire second career that can revitalize you and provide extra income well into what we used to call our golden years. Irving refers to an “encore career,” which he himself embarked upon and which your humble blogger is attempting to chronicle in this blog.

There are, to be sure, economic and investment implications to all this. For a taste, let me quote from Milken’s foreword:

“The economic benefits far outweigh the challenges that come with an aging society. The extension of life, and the extension of healthy life, are positive developments to be celebrated, not feared. Their impact will be an economic boon, not a drag.”

Jonathan Chevreau is the editor-at-large of MoneySense. He blogs here and at findependenceday.com. Find him on Twitter @jonchevreau.

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.