Consider Longevity Risk
Last updated 4/18/2019 at 9:14pm
Did you know keeping money in cash, checking, CDs and money market can increase your risk? Okay, let me be honest and admit that first sentence is intended to grab your attention; however, the statement is 100 percent true! Allow me to explain. I am quite certain when people use the word "risk", they are referring to market risk and/or security risk. If that is one's only concern, then CDs and cash are going to offer you the lowest level of risk.
However, it is prudent to consider all possible risks. Being overly conservative exposes investors to increases in longevity risk. Thanks to technology and medical advances, most of us are all living longer. A long retirement is an expensive retirement. Longevity risk is real and should be strongly considered in all investment decisions.
Longevity risk is one of the fastest rising threats to wealth plans and it's not going away. Pew Research Center estimates that in 2018, 80,000 people in the US will be over 100 years old. This number will grow to 1,000,000 by 2050. Even if we don't all live to 100, we should still plan for our financial future assuming we are going to.
One main factor that makes longevity risk so dangerous is inflation. Historical data shows that in approximately 23 years everything that we buy will cost twice as much. Given that an average retirement lasts much longer than 23 years we should seek securities that provide lifetime income that has a guaranteed increase over time. With the current increases in short term interest rates some strong solutions in this area have recently become available.
A second and even more impactful aspect of longevity risk is the skyrocketing costs of long-term care expenditures. An otherwise sound financial plan can be completely wiped out in five short years if a hedge against long term care expenses is not in place. Investors should not assume they will not qualify due to recent health issues as some hedges against this risk can be made without underwriting.
Furthermore, being conservative has gotten much more expensive over the past 15 years. So, what exactly do I mean? Twenty years ago, if someone wanted to be conservative, a bond ladder portfolio earning 6 percent of high-grade bonds could be purchased. This was conservative; the principal was protected because interest rates were decreasing (falling rates increase the value of bonds), and even if principal remained constant, a 6 percent annual interest rate was solid. For folks that felt bonds were too risky, they might have purchased short-term CDs that were paying in the 4 percent range. Fast forward to today, we find interest rates at much lower levels. Money markets, certificates of deposit, checking accounts, short term government bonds and savings accounts all offer very low returns today. The interest rates on these investment vehicles don't keep up with inflation. To dive deeper into how "costly" it has become to hold cash equivalents, the chart below is a good example:
YEARS - 3% GROWTH
1 - $50,000
5 - $56,275
10 - $65,239
15 - $75,629
20 - $87,675
25 - $101,640
30 - $117,828
This chart shows us that $50,000 will grow to approximately $118,000 if we earn just 3 percent annually. There are millions of retirees who have $50,000 or more sitting in cash equivalent accounts at this very moment earning next to nothing. By holding these cash equivalents investors are increasing their own longevity risk!
There are a variety of reasons why so much cash sits in these types of low interest rate accounts. Some might be legitimate reasons; however, some investors are simply too afraid to invest. Some investors that take this overly conservative path have been burned in the past by poor investments. I suggest for folks in this group to at least explore other solutions. Today, there are many safe alternatives that are very successful at earning return without exposing the investor to market risk.
In fact, there are investment solutions that can eliminate 100 percent of market risk, while simultaneously lowering longevity risks. Sit down with an experienced financial adviser for some specific recommendations of investment solutions that will work harder for you than your cash equivalents. Also, given the fact that we are all living longer, these investment changes should be considered now more than ever.
In conclusion, from this day forward when someone says that a savings account is a wise choice because it lowers risk, you will understand that this is not entirely true. In fact, cash equivalent investments will increase longevity risk. When we hedge against all types of risk, only then, can we truly enjoy a financially stress-free retirement.
Article by Brian Ulch, who is an Investment Adviser Representative of Aventail Wealth Management, LLC, a state Registered Investment Adviser registered with the Florida Office of Financial Regulation. There are other regulatory agencies that may have limited regulatory jurisdiction over our business practices. Mr. Ulch is individually licensed as a life and annuity insurance agent registered in the states of Florida, California and Illinois. Mr. Ulch earns commissions from the sale of some of these products.
Mr. Ulch is the author of a book entitled "Achieving a Lifetime of Financial Comfort". For a complimentary copy please reach out to him, his contact information is listed below.
He can be reached by email at [email protected] or by telephone 863-333-1927
Firm website is: AventailWM.com
The information in this article is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Some of the information and data in the article has been obtained from outside sources. Mr. Ulch makes no representations or guarantees as to the accuracy or completeness of the information or data from these outside sources. The opinions expressed and material provided are for general and educational information purposes only and does not intend to make an offer or be considered a solicitation for the purchase or sale of any specific securities, investments or investment strategies or as specific investment advice to any one individual or entity. Investments involve risk and unless otherwise stated are not guaranteed. Be sure to first consult with a qualified legal, tax and/or financial professional before implementing any strategy discussed herein.