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A few years ago I attended the
100
th birthday party
for a family friend. Following a round of toasts and
tributes, this never-married, lap-swimming cente-
narian treated her admirers to a rousing song-and-
dance rendition of “Yankee Doodle Dandy.” And
she wasn’t alone on the dais: Her older sister, a
former member of the Women’s Army Corps,
joined her.
These two are the only
100
-year-olds I know, but
they’re not all that unusual anymore. In fact, the
number of centenarians in developed countries is
increasing at a rate of more than
5%
per year. At
that pace, the population of individuals aged
100
-
plus will double every
13
years, according to the
United Nations’ World Population Aging Report.
Of course, it’s still a fairly small subset of the popula-
tion that will live that long—scare tactics from
insurers and other financial-services providers notwith-
standing. Just
5%
of
65
-year-old females and
3%
of
65
-year-old males will make it to age
100
, according
to Social Security actuarial estimates. But a much
larger percentage—
29%
of
65
-year-old males and
39%
of
65
-year-old females—are expected to live
to age
90
, according to Social Security statistics.
Such longevity is often cheered as an achievement,
a tribute to individuals’ gene pools, healthy lifestyle
choices, and advances in health care. And rightfully
so. But the downside of living well beyond one’s
average life expectancy is that it can strain—or
worse, completely deplete—an individual’s financial
resources. With more baby boomers entering retire-
ment without pensions—meaning that Social Secu-
rity is likely to be their only source of guaranteed life-
time income—longevity gains heighten the risk that
more individuals will outlive their investment assets.
The first step in addressing longevity risk is to eval-
uate just how great the odds are that either you
or your spouse will have a much longer-than-average
life span. Health considerations, family longevity
history, employment choices, and income level may
all be factors. In fact,
40%
of adults underestimate
their longevity by five or more years, according to a
Society of Actuaries survey.
If you’ve assessed these considerations and are
concerned about longevity risk—or if you’ve deter-
mined that you’d simply rather be safe than sorry—
here are four key mistakes to avoid.
Mistake 1
| Holding a Too-Conservative Portfolio
When investors think about reducing risk in their port-
folios, they often set their sights on curtailing short-
term volatility—the risk that their portfolios will lose
10%
or even
20%
in a given year. But a too-conser-
vative portfolio—one that emphasizes cash and bonds
at the expense of stocks—can actually enhance
shortfall risk at the same time it’s keeping a lid on
short-term volatility. That’s a particularly important
point these days, given the fact that current yields
tend to be a good predictor of returns from these
asset classes. Not only are starting yields meager in
absolute terms—the
10
-year Treasury bond is yield-
ing just
2
.
6%
and certificate of deposit yields are
barely more than
1%
(if you’re lucky)—but interest
rates also have much more room to move up than
they do down. That will reduce the opportunity for
bond-price appreciation during the next decade.
With returns like that, retirees with too-safe portfo-
lios may not even outearn the inflation rate over time.
That doesn’t mean longevity-conscious retirees
should jettison these safer investments, as they
provide valuable ballast for the risky portions of a
portfolio. It does, however, suggest that those
concerned about outliving their assets should shade
their portfolios more toward equities than would
be the typical prescription for people in that same
age band. That means an equity allocation of more
than
50%
, even for those getting close to and in the
early stages of retirement. It also means healthy
doses of foreign stocks as well as U.S. stocks. (If you
find your portfolio is extremely light on stocks right
4 Longevity Mistakes to Avoid
Portfolio Matters
|
Christine Benz
