Thursday, February 6, 2014

Live long and Prosper--do the math

The following was published on September 1, 2013 and was written by Dave Lindorff 
Longer Lifespan = Longer Retirement
People are living longer, meaning assets need to last longer, too. In 1970, American men could expect to live to an average of 67.1, women to 74.7, according to the Centers for Disease Control. By 1995, those numbers were 72.5 and 78.9 respectively. In 2010, the numbers were 76 for men, 81 for women.

But those numbers are life expectancy from birth. For those already 65, life expectancy today is actually 17 more years for men and 20 for women, making the average life expectancy for the newly Medicare-eligible 82 for men and 85 for women. And thanks to better health care, lifestyles and living standards, a 65-year-old man today has a 30% chance of living to 90—and a 65-year-old woman has a 40% chance of reaching 90, according to research by Ron Gebhardtsbauer, an associate professor of actuarial science at Penn State University. In addition, a 2011 report by the Census Bureau says that a person at 90 statistically has a further life expectancy of almost five years.

But will all these nonagenarians have any money left? According to the Employee Benefit Research Institute, the average wage earner today will need $900,000 to fund his or her retirement. Michael Greene, senior vice president for business development and group financial planning at Ameriprise Financial Services says that even a couple with $1 million in retirement assets worries about maintaining their lifestyle.

Cut Back
For people who are already close to retirement, there is only so much they can do to address this new planning metric. You can't acquire more money once you are in or near retirement, and you can't dramatically, nor efficiently, increase the rate of return without piling on unacceptable levels of risk. The only way to address the possibility of the blessing of a long, long life is to cut back on spending.

Richard Bone, senior vice president for investments with Raymond James in Chicago, says cutting back on spending can often be the simplest way to make a predictable difference in the sustainability of assets. 

Slow Market/ Higher Expenses
With the Dow repeatedly setting new highs this year, and the S&P up about 19% through July 31, equities might look better than they have in years. But the old investing mantra—create a diversified portfolio and let the "magic of the market" grow one's assets—is losing its mojo. 

Mark Robertson, founder and managing partner at Manifest Investing, using projections from research firm Value Line, predicts an annualized 4% total return for equities markets over the next four years based on market values on August 2, 2103. That's well below the last century's 10%-11% annualized return. In general, analysts also predict increased volatility, with some warning of the potential for another crash.

This new economy means the standard assumption that a 4% annual withdrawal rate could provide for clients through retirement no longer works. Neither does a second crucial assumption, that retirement income should be equal to about 70% of pre-retirement income in order to maintain a client's standard of living.

More Savings/More Risk
For people in their 30s or 40s, preparing for a slow-growth market and a more expensive retirement means stepping up their savings rate.

If you are in or approaching retirement, the new reality means adjustments in investment strategy. Gone are the days of shifting assets into safe, low-risk bonds as retirement arrives. 
"People these days need to be willing to take some increased risk," agrees Raymond James' Reid. "It's not your parents' pension-based retirement anymore." She suggests buying a deferred immediate annuity to provide guaranteed income beginning at age 80.

Carla Masselink, senior vice president for investments with MKS Wealth Advisors of Raymond James in Holland, Mich., agrees with the need for many clients approaching retirement to adjust their risk tolerance upward. 

Morningstar's Benz takes a more cautious view. "People have become allergic to tapping their principal,"I think they need to shift from trying to generate income and to think in terms of total return, where you sell equities that have done well, harvesting your capital gains to add to your income in the good years."

Disappearing Health Care Safety NetTwenty years ago, Medicare covered most bills, and insurance, hospitals and drugs were cheaper, too, with Americans spending an average of $3500 per year on medical care, according to the U.S. Department of Health and Human Services. For a generation of people, many of whom worked for a single company for decades, company-sponsored retirement health insurance plans eliminated much of the worry and planning surrounding retirement medical issues.

Even a decade ago, the cost of a year in a nursing home was just $48,000, a National Institutes of Health study says. Health care is suddenly a top issue in retirement planning. Fidelity Investments estimates the average couple retiring in 2013 will spend about $220,000 on medical care. That $220,000 includes premiums for Medicare Plan B (doctors) and D (prescription drugs), as well as copays, deductibles and non-covered expenses like hearing aids and dentistry. Meanwhile, the HHS estimates 70% of retirees will need to spend an average of three years in long-term care. Costs vary by state, but can easily be double or triple that for assisted-living or tonier homes with private rooms.

Long-Term Care Strategy and Good HealthThe fear of a crippling health care crisis, over and above the staggering costs of health insurance, has made long-term care insurance a popular product. Most people don't spend years in a nursing home, but end up there only at the end of life, and then for less than two years (with up to 100 days of that covered at least partly by Medicare, if it is considered rehab from a hospitalization). Medicare will also pay up to 60 days a year (up to 37.5 hours per week) for in-home "episodic" care, such as speech or physical therapy, or other kinds of skilled care, as long as a doctor certifies a patient is housebound and the care is medically necessary.

Alicia Munnell, director of the Center for Retirement Research at Boston College, says that waiting until 70 to maximize Social Security benefits is "the best single investment a person can make." And reaping that investment is not just for those of meager means.
"Even our high net worth clients are concerned about maximizing Social Security," reports Theresa Fry, manager of IRA and retirement planning at Benjamin F. Edwards & Co. "It's almost like a rite of passage."

The bottom line appears to be that retirement is not a crisis, but it requires care, close periodic consultation, a willingness to pare expenses when markets slump and the ability to take on a bit more portfolio risk than planned. And stay as healthy and as fit as possible.

The worst thing you could do would be to end up at 90 with a huge pile of assets and lots of things that you wanted to do but couldn't afford to do. Instead of trying to eliminate all your risk, try to maximize your happiness.

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