June 25, 2021 by David Christianson
Last weekend we asked a friend how his grandmother was doing. We are always interested in her for a variety of reasons, one of which is that she was an instructor and mentor to my late father 60 years ago when he returned to university in middle age.
“She is still working”, came the reply, “though she claims she’s getting tired more often now.” She’s 101 and was still travelling halfway across the world to give sold-out lectures before the pandemic stopped such shenanigans.
Meanwhile, the TV show 60 Minutes recently did an update on the American National Institutes of Health-funded research study on aging called “90+”. It started in 2014 with a group of people in their 90s and tests them regularly on factors like mobility, cognition, memory and dementia.
Most of the participants are still going strong. The early findings were that exercise, social engagement and adding a few pounds as we age were all contributing factors to longevity. Not surprising, but the shocker was when the lead researcher stated that “Half of all children born today in the United States and Europe are going to reach their 103rd or 104th birthday.”
So, Dave, you ask, “What does this have to do with my finances?”
The stories are to remind you of a concept called “longevity risk”, to add to your many other financial concerns.
Do you worry about outliving your money? Many people do. It turns out that legitimate concern can be measured, and a plan developed to address it.
The concepts for accumulating money are well known and oft discussed. The concepts of “decumulation” or using your money to fund your retirement, are not quite as well known or widely implemented.
When you retire and start living on the earnings from your accumulated capital, one of the biggest risks you run is the sequence of returns. For example, if you retired in 1976 and proceeded to withdraw 4% per year from your investments (60% stocks and 40% bonds) and increased that amount each year with inflation, you would have more money today than when you started.
However, if you’d retired in 1974 and followed the same process, you ran out of money before 20 years had passed. The problem was not adjusting when the markets declined significantly in years one and two of retirement and continuing to take out the same amount of dollars, forcing you to sell low. Once you get that far behind…
So, concept one is to avoid ever selling investments when they are low. That means always having adequate cash and guaranteed investments in place to fund at least 2 to 3 years of expenses. Replenish that cash reserve whenever your equity investments are high.
Also optimize the tax efficiency of your portfolio and focus on investments that provide regular reliable income, so you are not dependent on capital gains and growth exclusively.
We always do this planning using measurements of each client’s unique income needs, total resources and rate of return required, psychological and financial risk tolerance, and likelihood of surprises. Our prescription might therefore be much different for someone with a generous pension plan versus someone living completely on their accumulated savings.
I attended a recent webinar with speaker Moshe Milevsky, a finance professor at York University and respected researcher on the science of decumulation. He talked of some people being “longevity risk averse” (afraid of being old and broke) while others are “longevity risk tolerant” (either not worried about living long or not concerned about running out of money).
People with solid pensions should be more longevity risk tolerant as, objectively speaking, they have less risk of running out of money. But there are definite other factors, like a person’s desire to spend more money in the “go-go” years of early retirement and their propensity not to worry about having extra money in the later years.
It turns out, like everything else, this can be measured. It’s another important factor to know about yourself as you plan out your decumulation financial plan.
* * *
Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
Please consult legal, tax, insurance and investment experts for advice on your unique situation.
David Christianson, BA, CFP, R.F.P., TEP, CIM is recipient of the FP Canada™ Fellow (FCFP) Distinction, and repeatedly named a Top 50 Financial Advisor in Canada. He is a Senior Wealth Advisor & Portfolio Manager with Christianson Wealth Advisors at National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.