2.) Longer life expectancy (See also the Hub’s Longevity & Aging section for more on this trend.) Go the full link at USA Today to click on its Life Expectancy Calculator.
3.) Social Security (or for Canadians, CPP/OAS/GIS. More on that in Monday’s Financial Post)
4.) Choices in the financial marketplace: stocks, bonds, insurance, annuities, mutual funds and ETFs, real estate, commodities, hedge funds
Today’s blog title comes from Chapter 14 of The Upside of Aging, a book we mentioned several weeks ago at sister site FindependenceDay.com. This is recommended reading for anyone nearing the traditional retirement age. It consists of 16 essays from various experts, all of whom look at the topic of longevity through various lenses: urban planning, global demographics, healthcare and pharmaceutical research and so on. For example, Ken Dychtwald of Age Wave pens an interesting essay titled “A Longevity Market Emerges.”
Pictured below is Dan Houston, president of Retirement, Insurance and Financial Services for the US-based Principal Financial Group, who wrote the chapter I flagged in the title.
Retirees can expect one spouse to reach 90
Dan Houston
Houston begins by observing that because of longer expected life spans, the mind-set around retirement is evolving, and for the better. “Couples age 65 now have a 45 per cent chance that at least one will live to age 90,” Houston says, citing the Society of Actuaries, “This may be the first time in history where someone spends more years in retirement than in a traditional working career.”
The downside is of course financial: living another 20 to 40 years after leaving the workplace comes with a “substantial cost,” Houston says, “one that has to be funded. It’s an increasingly challenging prospect given inflation, the high cost of health care, and the risk of outliving savings.”
Try living on $400/month
The statistics, at least in the U.S., are not encoring. Fewer than four in ten pre-retiree households (aged 55 to 70, not yet retired) have financial assets of US$100,000. And even if they did have that amount on the nose, it would generate guaranteed lifetime income of just $400 a month.
Many think they’ll need less income in later life than recommended and many plan to draw down on assets at such high rates (9% a year on average) that assets will be depleted within 13 years. The recommended “safe” annual withdrawal rate is closer to 4%. They underestimate the cost of unreimbursed health care costs: in the U.S. Houston estimates a moderately health retired couple will need US$250,000 just to cover health care expenses and premiums throughout retirement. This is one area that Canadians may be ahead because of our universal health care system.
Don’t count on working in retirement
I’ve said before that the solution to this is to “just keep working,” but of course this may not always be an option. It’s a sad fact that agism still prevails in the workplace and costly older workers may be asked to leave before they’re ready to do so; and eventually body or mind may not permit full-time work even if one can find a willing employer. Houston says pre-retirees tend to overestimate their ability to work for income in retirement: more than two thirds expect to be able to supplement retirement income with some work but in reality, only one in five retirees actually works. That statistic, Houston observers, “reflects availability of work, as well as ability to work.”
Just as disturbing is the fact that 55% of American workers, and 39% of retirees, report having a problem with their level of debt. And those who do manage to save are not saving enough: 43% of workers report that neither they nor their spouse is currently saving for the future, while 57% report the total value of savings and investments is under US$25,000.
Four key investment risks
Even where there is ample savings to invest, Houston lists for key risks: inflation, market volatility, income and longevity. These are all linked: the longer you live, the more inflation can cut into your income. Consider this alarming stat on inflation’s power to erode savings: a dollar invested int he S&P500 in 1971 grew to $2.27 by 1982 but on an inflation-adjusted basis, that dollar depreciated to 96 cents. Houston notes that even annual inflation of 3% will cut a retiree’s purchasing power in half.
This calls for investments that have a fighting chance against inflation: Houston mentions Treasury Inflation-Protected Securities (TIPS, known in Canada as Real Return Bonds or RRBs); commodities, global REITs, natural resource stocks and Master Limited Partnerships.
As if that’s not all enough to keep a retiree awake at night, Houston reminds readers that the “insolvency” date for America’s Social Security system keeps moving closer: 2033, according to Washington’s May 2013 estimate. Meanwhile the over-65 population will double between 2010 and 2050.
As has been noted elsewhere, every day 10,000 baby boomers turn 65. While Canada’s combo of CPP and OAS seems on relatively solid ground, I continue to believe the best way to prepare for a long-lived retirement is to spread your income sources around: employer pensions, savings in RRSPs, TFSAs and non-registered plans, the government plans mentioned above, some part-time work or business income and perhaps rental income from investment real estate.
There are many fundamental reasons for believing that stock markets may have embarked on a long-term bull market comparable to those in the 1950s and 1960s, or the 1980s and 1990s, and that this process is nearer its beginning that its end.
He presents four arguments for a “structural bull market.”
1.) The worst financial and economic crisis in recent memory has ended and most of the world economy is enjoying “decent, if unspectacular, growth.”
2.) While not perfect, economic and financial policies around the world are predictable and so “unlikely to cause further market disruptions.”
3.) Technology continues to advance and innovation should stimulate investment and consumer demand.
4.) Inflation is “almost nonexistent” in the advanced economies, so “interest rates are guaranteed to stay low for a very long time.”
What’s going on with oil? Not a day goes by without extensive commentary on (literally) the fuel of the industrial economy worldwide. Plunging oil prices. Keystone and pipelines to the southwest or Canadian east? At the Financial Post this weekend, two of six trending topics are Keystone XL and oil prices. Baker Hughes may or may not merge with Halliburton. Fracking and the shale revolution continues to bring the United States closer to energy self-sufficiency. Saudi Arabia seems happy to supply the West with cheap oil even as that puts the squeeze on nations like Iran and Russia, and other petro nations that desperately need much higher oil prices. And what of Canada’s oil sands? Also in the Post, Yadullah Hussain ties together many of these disparate threads a piece headlined Who will blink first as global oil prices collapse?
Not the consumer, surely? Our family runs two hybrid vehicles but we’re still happy to be able to buy cheaper gas. Airlines and the travel industry surely welcome this development.
What about peak oil?
What ever happened to peak oil? Have we heard from Jeff Rubin lately? Here’s a piece from Canadian Business written two years ago about whether his call was wrong. His book suggested sky high oil prices meant we’d curtail travel and become more local. Luxuries like salmon would become prohibitively expensive?
Weren’t higher oil prices supposed to be inflationary? And wasn’t that supposed to be bad for the stock market? So aren’t low prices to be cheered, unless of course you’re overweight oil stocks?
Here at the Hub, we don’t profess to have all the answers but we will endeavour to point to sources that can shed light on complex geopolitical topics like this one.
For the longest time, Robert Bengen’s 4% annual withdrawal rule (plus an inflation adjustment) was the gold standard for simplicity in estimating SAFEMAX: a safe annual maximum withdrawal rate from retirement nest eggs that minimizes the odds of having to break sharply into principal at too fast a rate, thereby leaving little or nothing in advanced old age.
Of late, there’s been a lot of articles questioning this rule. Actually, it’s been going on for awhile. The following piece from Investment News goes back to early 2012. You may have to register to read the full piece but it’s free once you enter your email and probably worthwhile to bookmark them anyway. And you might want to do the same here at the Financial Independence Hub too! — JC
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From USA Today this weekend comes this article by Bob Powell that should give “those saving for or living in retirement” several trends or statistics to be thankful for.
