investing
While the sentiment, "if I'd known I was going to live so long, I'd have taken better care of myself," pokes at the prospect of outliving your health, outliving your wealth is no laughing matter in today's era of longer life spans and, consequently, longer retirements. Increasingly, the retirement-minded should balance investment risk with longevity risk. And that could mean staying weighted in equities at a higher level, and for a longer period, than traditionally thought to be wise.
How can pre- and post-retirees make the prospect of prolonged, necessary investment risk more manageable? Perhaps as they likely have managed all kinds of prolonged, necessary risk throughout their lives. They insure against it—in this case, using the living benefit riders available at an additional cost from one of today's variable annuity contracts.
A Critical Investment Period
Increasing medical costs, rising life expectancy and the shrinking role of defined-benefit pension plans have combined to create an investment period that Prudential Financial has dubbed the Retirement Red Zone[SM]. Our research has found that this period, the five years before and the five years following retirement, can, if properly navigated, help provide the thrust a portfolio needs to help clients enjoy a long retirement.
While the Retirement Red Zone[SM] is no time to take the risks of someone with a very long time horizon, it also is not a good idea to dramatically ratchet down risk, not only because people spend so much time in retirement, but also because a comfortable level of risk should not be discounted purely for tradition's sake.
The New Retirement Reality
Smoothing volatility with safe and low-yielding investments such as bonds and money funds may likely fall prey to the effects of inflation, which has grown an average rate of 3.9%, since 1948, according to the U.S. Bureau of Labor Statistics. When people face the prospect of spending decades in retirement, odds are inflation and expenses will outmatch shortsighted portfolio planning.
The conventional guideline for retirement investing has been to subtract your age from 100 and let the sum serve as the percentage of your portfolio you should hold in equities. However, that advice was probably better suited to days when people spent very little time in retirement.
In "The Transformation of Retirement in Twentieth-Century America: From Discontent to Satisfaction," author Melissa Hardy cites the estimates of Seymour Wolfbein's "The Length of the Working Life" (1949), which found that at the turn of the century, the average 20-year-old worker "could expect to live another 42.2 years, 39.4 of which he would spend in the labor force, which left three years for retirement. By 1940, the average 20-year-old male worker could expect to live an additional 46.8 years and work for another 41.1 years, leaving about six years of retirement."
In 2000, according to elderweb.com, Americans could expect to spend 18 years in retirement, a staggering triple the number of years in retirement since Social Security was introduced.
The Role of Insurance
"When in doubt about investing, the safest way is the conservative," proclaims a 1914 advertisement from the brokerage firm of Chisholm & Chapman in the monthly news magazine "The World's Work." Some of that thinking is still in effect today, despite mortality tables that make it outdated.
On Oct. 11, 2004, Prudential Financial Chairman and Chief Executive Officer Art Ryan in Chicago addressed the American Council of Life Insurers' annual conference as its outgoing president. At the time, U.S. presidential candidates were crisscrossing the country questioning the future of Social Security, Americans for a Secure Retirement released another dire readiness report, and The National Retirement Planning Coalition made "serious challenges" the locus of its upcoming National Retirement Planning Week. Ryan used the occasion to encourage the insurance industry, as proven managers of trillions of dollars in long-term assets, to bring leadership and clarity to a retirement environment which has largely become the responsibility, of the individual investor.
Today's insurance and annuity products may help remove some of the concern individual investors have when faced with financing a retirement that can be decades long. They can help retirement-minded investors stay properly invested to hedge market exposure and minimize longevity risk.
