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Put Longevity into Your Planning

Written by Les Detterbeck.

 

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We’re living longer. Back in 1935, when Social Security was started, there were 8 million Americans 65 or older. Today, there are 50 million and by 2060 there will be 100 million 65 and older. It is projected that in 2033, the population of 65 and older will, for the first time, outnumber those under 18.

In addition, there is a better than average chance that 65 year old investors with at least $1 million of investable assets will reach age 100. These folks not only have enough money to cover rising costs, they are also generally more physically fit, healthier and engaged. BTW- May is Older Americans Month, with a theme of “Engage at Every Age.”

Longevity is having and will have a huge impact not only on social security but also on long-term financial planning. The trust fund for social security retirement benefits is expected to be depleted by 2034. After that, the program is projected to pay out about 75% of benefits. At that time, the ratio of workers paying into Social Security, as compared to those receiving benefits, is projected to drop from 2.8 now to 2.1 then. Last month, Ginny provided information on social security including possible fixes http://www.dwmgmt.com/blogs/142-happy-national-social-security-month-.html. We hope Washington will enact some appropriate changes soon, though we can’t control that process.

We can, however, control our own financial planning. Here are some general tips on incorporating longevity into your planning

1.Plan based on living longer. For those of you in great health, use an eventual age past the actuarial age, perhaps even age 100. Your plan may end sooner, but let’s make sure the plan is designed for you to have sufficient funds during your life time.

2.Plan on your normal retirement expenses continuing until at least age 90. Most older Americans we know are engaged. They are working and volunteering, traveling, mentoring, learning, and participating in activities that enrich their physical, mental and emotional well-being. Don’t expect your normal expenses to start declining before age 90.

3.Plan on health care costs escalating faster than inflation. Investors worldwide agree that health expenses are their biggest financial concern related to longevity. This worry is most acute in the U.S. with 69% listing it as their number one worry, versus 52% globally. We are currently using 6% as the estimated annual increase in health care costs in our planning for clients.

4.Review your long-term care strategy early. Long-term care costs can be huge. On the other hand, your plan might “end” without you ever needing long-term care. What would be the cost and best way to insure? Should you self-insure? Should you keep your current policy? Should you modify it? Every financial plan needs to address long-term care and develop an appropriate strategy.

5.Use an ample estimate for inflation. Inflation can have a huge impact on expenses over a long period of time. You should stress test the plan at inflation rates above 2%, such as 3% or higher.

6.Use a realistic real return for investments. The real return for your investments is defined as your total return (which is the price change over the period + dividends/interest) less inflation. From 1950 to 2009, the real return was 7%; composed of an 11% total return less 4% inflation. Of course, the 50s, 80s and 90s all had double digit real returns. Today, it’s a good idea for you to stress test your plan projections using lower real return assumptions like 2.5% to 4%, depending on your time horizon and asset allocation.

7.Consider separating travel goals into two parts. When you are retired and mobile, your travel will likely be primarily for you (and your significant other) and may include your children and/or grandchildren. As you get older and can’t travel easily yourself, you might still provide a second travel goal to cover transportation of the kids and grandkids to come visit you.

8.Don’t count on too much from Social Security. We work with successful people of all ages. We think that long-term social security benefits may be subject in the future to some “means test,” perhaps the same way that Medicare Part B premium costs are tied to taxable income. The younger you are now and more financially successful you are in your life will likely reduce the amount of social security you will eventually receive. If you are not starting social security soon, consider using discounted values of future social security benefits in your planning.

9.Work to have a planning graph that doesn’t go “downhill.” Our financial goal plans show a graph of portfolio value over time, beginning now until your plan ends. If expenses and taxes exceed income and investment earnings in any year, then the portfolio declines. If that situation continues, then the graph looks as if it is heading “downhill.” A solid plan results in the graph moving uphill over time or at least staying level. A solid plan therefore reduces anxiety about longevity as, year by year, the portfolio value stays “solid” without diminishing.

Just like possible changes in social security, none of us can control our future health or when our plan will end. We can however, develop, monitor and maintain a long-term financial plan that will provide us with the best chances for financial success by recognizing the possibilities of longevity and incorporating it into all aspects of our planning. We can also adopt and/or confirm an objective to “Engage at Every Age” for our own well-being, as well as making a difference in other’s lives. If you have any questions, please give us a call.

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