Take a second and think to yourself, how long do you think you will live? I realize it’s a morose thought, but honestly what age do you think you’ll pass away? You may consider your current health, your family history or a variety of other factors to make the estimation. When I ask investors what age they believe they will live to, an overwhelming number of respondents estimate somewhere between their late 70s and early 80s. Very rarely do I ever hear anyone say they will live into their 90s.
But did you know the life expectancy for the average non-smoking American couple is 92 years old according to the Society of Actuaries?
Let that sink in.
This means there is a 50% chance that you or your spouse is going to be alive (and need income mind you) at 92 years of age. And this is just the average non-smoking couple. But, taking this to another level, it’s likely that if you are reading this you are probably not the average couple. You’ve probably made better than average income, received better healthcare, worked a less physically demanding job, and taken better care of yourself.
Additional data from an article in USA Today based on data from the Society of Actuaries:
There’s a 25% chance that a 65-year-old man will live to 93; a 25% chance that a 65-year-old woman will live to 96; and for a couple 65 years old, there’s a 25% chance that the surviving spouse lives to 98, according to SOA projections.
Many people would not consider a 25% chance of something happening to be insignificant. So I’ll restate; there is a 25% chance that the surviving spouse lives to age 98. That being the case, it’s certainly possible (probable) that you and your spouse have a joint life expectancy that extends well beyond age 92.
Consider what this means for your portfolio income plans. Your portfolio will potentially need to support your lifestyle for over 30 years.
Based on my very informal ongoing survey, it’s likely that people are drastically underestimating how long they’ll live. And because longevity and inflation risk are inextricably linked, most retirees must also drastically underestimate the potential impact of inflation on their retirement.
As far as the cost of living goes, what do you think is likely to happen over the next 30+ years? Let’s look at what’s occurred over the last 30 years for some insight.
Average Cost of Various Goods in 1988:
Postage Stamp: $0.24
Dozen Eggs: $0.65
A Gallon of Gas: $0.91
Gallon 2% Milk: $1.89
Movie Ticket: $3.50
Ford Taurus: $9,996
*Data from The People’s History
Cost of the Same Goods in 2018:
Postage Stamp: $0.49 (2.41% annual compounding increase)
Dozen Eggs: $2.38 (4.42% annual compounding increase)
A Gallon of Gas: $2.94 (3.99 % annual compounding increase)
Gallon 2% Milk: $3.18 (1.75% annual compounding increase)
Movie Ticket: $11.75 (4.12% annual compounding increase)
Ford Taurus: $27,690 (3.45% annual compounding increase)
*This Data is from Numbeo.com and Ford’s website.
The average general inflation rate for the period from 1988 to 2017 was 2.54%. But as you can see above, the cost of many goods and services increased at a much higher rate, so the general inflation rate isn’t necessarily indicative of what you might experience for purchases that you make on a regular basis such as groceries, gas, and more.
If we assume a 3% forward-looking inflation rate, the cost of these same goods will cost much more 30 years from now.
Hypothetical Cost of the Same Goods in 2048:
Postage Stamp: $1.19
Dozen Eggs: $5.78
A Gallon of Gas: $7.14
Gallon 2% Milk: $7.72
Movie Ticket: $28.52
Ford Taurus: $67,210
The problem with this data is that you never notice prices increase because it doesn’t happen all at once. Or even looking at one specific product from the list, it looks like it wouldn’t even matter that much. But inflation happens as a slow material grind against your checkbook. And while you were busy just living your life, inflation caused the average price of your everyday purchases to more than double, increasing from $20 to $48.55.
Even saying that I’m still slightly worried that seeing those numbers won’t make the impact required to encourage investors to rethink their retirement strategy. So, stated another way, if you know your total bills right now are somewhere in the ballpark of $100,000 per year, then in 30 years you will need over $242,000 just to live an equivalent lifestyle. That is NOT an increase in standard of living.
This inflation issue is a bit like drinking contaminated water - you don’t realize it’s a problem until it’s too late. Assuming you are lucky enough to live a long life (which statistically speaking you will be that lucky) to allow for multiple decades in retirement, there will come a time where you’ll notice the impact of inflation. The question is will you prepare for this eventuality in advance?
Longevity and the income that a long life will require must be the most underestimated variables in retirement planning. So many prospective clients that I meet with ask questions about what the coming midterm elections will mean for their portfolio, what is going on with the market volatility, whether they should invest in gold or a variety of other short-term market-based questions. I believe they’re asking the wrong questions.
The truth is unless you blow your portfolio up in reaction to one of those events, it’s likely that those events will be forgotten in a span of a few months/years. Can you remember any major market events from 2012? Maybe you remember the “Fiscal Cliff” since it was most certainly broadcast as the end of the world just like market events always are. But, if you based your portfolio on the market events of the time, you probably decided a conservative strategy was the way to go and therefore may have missed out on the market’s ensuing growth. For some additional perspective: The DJIA closed 2012 at 13,104 and although we don’t know the future, today we stand at 25,226 as I write this and inflation has picked up along the way.
Unfortunately, conventional wisdom ignores both the likelihood of a long life and the subsequent compounding negative effects caused by inflation. The first time you hear this reality, you might respond that you’re still nervous about the market and I’d say that is a natural concern to have. And surely having a conservative portfolio makes you feel warm and fuzzy right now. But, what about your future self?
That perspective is likely not aided by your advisor since many advisors feed into this concern by recommending you become ultra conservative in your portfolio just as you’re retiring, which is what most people want to hear anyway. It’s all about conserving your principal, right? To be clear, I’m not saying you should practice ignorance with regard to market events or that you invest everything in the stock market. In fact, I’m not making any recommendations at all.
I am simply arguing that it would be prudent to find a strategy that fights both battles at once, market volatility in the near term and inflation in the long term. It is not an either/or scenario. It is a both/and scenario. If you choose to ignore future inflation because you’re worried about the market, you must understand that you are simply trading one risk for another. By choosing to invest in an overly conservative portfolio because you’re worried about short-term gyrations, you are by default subjecting yourself to the very real long-term risk of running out of money far earlier than anticipated. Understanding the real long-term consequences of a decision may be the only way to battle the short-term emotions that accompany such decisions.
For example, imagine for a moment that you finally paid off your home. A few days later, you tell your friend that because your home is fully paid for you are planning to drop your homeowner’s insurance since its no longer required. Your friend would think you’re probably making an irresponsible decision to say it nicely. Why? Because the potential consequences of that decision are so severe. If your house did burn down, you’d be on the hook for rebuilding it. All the while, based on the data, the chances of your home burning to the ground are statistically far more remote than you or your spouse living to age 98 and yet the latter risk is commonly ignored.
Making matters worse, unlike the folks that retired in the 80s, your portfolio very likely isn’t going to be buoyed by the great bond bull market that just recently came to a close. Interest rates are still near historic lows. You must understand that to have any chance of your portfolio paying income and keeping up with inflation, you must account for both risks. You simply cannot afford to ignore either one.
So, what’s the point? I am saying is that you need to have this discussion with your advisor. If your portfolio is primarily fixed income, what rates of return are being assumed given the low-interest rate environment we’re in and what are you doing to defend yourself against the increases in the cost of living caused by inflation? Concurrently, how does that strategy allow you to take income from your portfolio when the market does fall? We know the market inevitably moves up and down, and sometimes in drastic fashion. That’s perfectly normal market behavior, so you should consider a strategy that allows for the income you need while accounting for the future impact of inflation.
There are ways to structure your portfolio to help you handle the ups and downs of the market while still planning for a 30+ year retirement. You can accomplish this by assigning a purpose to each asset in your portfolio. I couldn’t begin to tell you what you should do specifically within your portfolio because each investor’s situation is different and there are a lot of moving parts to that go well beyond the scope of this post. In my opinion, the variables that will have the greatest impact are:
- How much income you need from your portfolio
- The relative size of your portfolio
- You tax situation
- Your guaranteed sources of income
- Willingness to have a more dynamic approach to portfolio withdrawals
- Your risk tolerance
- Your age
There are many variables that go into this discussion that should be considered when building an appropriate retirement portfolio. My goal is simply to plant the seed of what the potential repercussions are for following conventional wisdom by ignoring the true impact of inflation. Please don’t kick this can down the road. If you do, by the time you realize it’s an issue, it will be too late.
Instead, ask your advisor, “How do I build a portfolio that accounts for the probability of a long life while addressing the need for a consistent stream of income through volatile markets?”. Then listen to the answer. If the strategy is not easy to understand, consider seeking out a new advisor.
Know that you can and should do something about this. Think about your current situation and ask yourself, do you have a strategy you are confident will get you across the finish line? If not, you might want to get on it.
The Society of Actuaries put together a longevity illustrator that allows you to input your age, basic health, etc…to establish a hypothetical illustration of your life expectancy. I’ll bet that the results will surprise you. And the write up associated with it is truly fascinating! Here is a link to the Longevity Calculator.
From the Society of Actuaries: How life expectancy can impact retirement planning infographic
From the USA Today: For your retirement planning, count on living until age 95
Disclaimer: Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The foregoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision.
The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stocks maintained and reviewed by the editors of the Wall Street Journal.
Any information provided in this post has been prepared from sources believed to be reliable, but is not guaranteed by Raymond James Financial Services and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for informational purposes only and does not constitute a recommendation.