Factors in Retirement-Longevity and Working Career

In previous postings, we discussed some of the factors facing prospective/current retirees. These factors were classified in three general categories: 1) factors over which we have total control, 2) factors over which we have some control, and 3) factors over which we have no control. The second category (factors over which we have some control) included:

1. Longevity, and
2. Employment earnings and duration.

The second category is the subject of today’s posting.

 

Longevity

 

Genetic factors play a significant role in how long we live; so do life style choices. While individual life spans are difficult to predict, actuarial data allow us to view life spans in aggregate. First, women live longer than men and life span has been increasing.

 

Average Life Expectancy at Age 65¹

Year	Women	Men	Difference
1990	84.1	80.1	4.0
2015	85.5	83.1	2.4

Second, if you are 65 today, then:

Probability of Living at Least to (or Beyond) a Specific Age²

Age	Women	Men	Couple (1 alive)
75	85%	73%	97%
80	73	63	90
85	55	43	74
90	33	22	48
95	13	7	20
100	3	1	4

These figures are mid-points, not an end-point. The bottom line: you may need to plan on living much longer in retirement (perhaps as long as your working career). Consequently, a portion of your investment portfolio should be structured for growth in order to maintain purchasing power over the retirement years.

Employment Duration

Income in retirement has been compared to a “three legged stool” composed of pensions, Social Security, and investment/savings. Now a fourth leg has been added (a chair??) with employment income in retirement. As the population ages, the percent of older people in the work force has been increasing. In 1994 there were 31 million people age 65+ in the civilian population; that number had risen to 45 million in 2014 and is projected to be 62 million in 2024.³  By age groups, the number working is even more interesting.

Percent of Individuals in the Civilian Labor Force³

Age	1994	2004	2014	2024 (Est.)
65-69	22%	28%	32%	36%
70-74	12	15	19	23
75-79	7	9	11	14

People work in retirement for various reasons:

Major Reasons People Work in Retirement⁴

Reason	Need	Desire
Buy extras	26%	-
Make ends meet	25	-
Keep insurance/benefits	23	-
Decreased value of savings/investments	21	-
Stay active/involved	-	56%
Enjoy working	-	54
Job opportunity	-	24
Try new career	-	8

Finally, the age at which one retires is not always the date of anticipated retirement. Sixty-seven percent of workers expected to retire at age 65 or older. Only 23% retired as planned; the actual median retirement age was 62.⁵ Reasons for earlier retirement included the following:

Reasons for Retiring Earlier Than Planned⁵

Reason	Percent
Health problems/disability	60
Employer changes (downsizing/closings)	27
Other work related items	22
Care for spouse/family member	22
Superannuated work skills	10
Ability to afford early retirement	31
Choose to do something else	17

The Bottom Line

The “law of large numbers” whereby we look at aggregate statistics can provide some information for use in financial planning. Those “large numbers” indicate that an individual may have a much longer time in retirement than anticipated, and there may be fewer working years to save for retirement. Individual circumstances vary of course; please see us at Paragon Financial Advisors to review your “retirement readiness.”  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients. 

 

¹ Social Security Administration 2016 OASDI Trustees Report

² Social Security Administration Period Life Table 2013 (published 2016)

³ Bureau of Labor Statistics, Monthly Labor Review, December 2015

⁴ Employee Benefit Research Institute, Matthew Greenwald & Assoc. Inc. 2014 Retirement Confidence Survey

⁵ Employee Benefit Research Institute, Matthew Greenwald & Assoc. Inc., 2016 Retirement Confidence Survey

Longevity of Retirement Income

In early May, we attended an “Inside Retirement” conference sponsored by Financial Advisors magazine; the topics were centered on “income and longevity.” Various nationally known speakers discussed pertinent items related to those themes. We found some presentations worthy of discussion here. Some presentations were individual speakers; some presentations, panel discussions. Various concepts were presented for discussion; we don’t necessarily agree with all ideas presented but did find most of them thought provoking.

 

The World Today

 

Interest rates today are at historic lows. The 10-year US Treasury note yields approximately 1.8%, and some overseas developed countries have negative interest rates for their sovereign bonds. Low interest rates mean lower earnings available from an investor’s bond portfolio to supplement retirement income. Also, since bond prices relate inversely to currently low interest rates (as interest rates increase, bond prices decrease), bond prices are currently high.  The Federal Reserve Governors have continuing discussion about when (not if) to raise interest rates.

 

The stock market also poses some interesting challenges. Volatility in the market is significant, and some market analysts feel that stocks may be overvalued. Low interest rates have made some investors move into dividend yielding stocks in search of return—taking increased risk in the stock market in exchange for a higher current yield. Note that this higher current yield could be offset by loss in value if the stock prices decrease.

 

Other sources of retirement income have come into question. Social Security, a major source of retirement income for many Americans, faces funding shortages in the not too distant future. Changes are needed; however, the nature of those changes is still to be decided.

 

Finally, retirement life spans appear to be increasing. As life expectancies increase (and people are not working significantly longer), the length of time spent in retirement increases. Couple that increased longevity with potentially higher health care costs, and we face increasing pressure for financial longevity.

 

What to Do?

 

Much has been written and discussed about retirement planning (or the lack thereof) of Americans. We believe that retirement should also have a defined plan. Such planning should include planning for contingencies, structuring an investment portfolio, and a distribution strategy from any qualified plans. Since our major discussion above was related to investments, that’s what we will discuss here.

 

Market volatility is a fact of life. Stock market downturns will occur: the questions are when and how much. A retiree needs a stock component in a retirement portfolio. Stocks provide the long term growth necessary to preserve buying power over the long term—especially given the longevity previously discussed. Consequently, an investment portfolio should be structured to provide several characteristics.

 

1. Liquidity--enough liquidity to cover necessary expenses over years when the stock market is down. This structure implies cash equivalents and bonds to cover 4-5 years of needed income without having to sell stock in a down market. Liquidity also means the ability to readily convert a portfolio holding into cash. In the 2008 downturn, some securities (auction rates) could not be readily sold at a fair market price.
2. Total Return—low interest rates practically guarantee that an investor cannot meet all income needs from interest income only. Therefore, consider an investment plan that encompasses interest/dividend income with harvesting some of the investment gain in the portfolio. That’s “total return” investing where the income needs from the portfolio are met from a combination of dividends, interest, and gain from appreciated securities.
3. Diversification—much has been made of the need to diversify assets. That diversification should include asset classes that may not have been utilized in the past. Use of alternative investing strategies (hedging techniques, conservative option strategies, etc.) and asset classes (commodities, etc.) may be warranted in selected portfolios. Note that alternative investing may be used to reduce risk, not just as a yield enhancement.

 

Investing for long term income in the current environment poses special challenges. Not all items mentioned here are necessarily advisable for all investors. We at Paragon Financial Advisors assist our clients in building portfolios that match that particular client’s goals and objectives. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

 

 

Paragon Perspectives

Retirement is a popular topic of discussion and, in some cases, an item of concern. There have been television commercials of “What is your number?” and “Do you have enough money for retirement?” This Quarter's newsletter discusses some of the factors that lead to a successful (financial) retirement. These factors can be complex and our discussion here is purely a cursory one.


We, at Paragon Financial Advisors, will be happy to have a more in-depth conversation with you about your personal circumstances. One particular success factor listed in Part 2 (portfolio expense) is one we monitor. Any mutual funds chosen for our client portfolios have no sales charges (for sales or purchases) and we try to select appropriate mutual funds with minimal expense ratios. For appropriate accounts, we select individual securities; this selection eliminates expense ratios completely.


 In addition, we at Paragon have negotiated lower security transaction fees for client transactions—again reducing the expense of investment management. The final item discussed is a graphical chart of funds flowing into and out of stock and bond mutual funds. The bottom line is most investors do the wrong thing—selling when they should be buying and vice versa.


If you did not receive a copy of this Quarter's Newsletter and would like to request one please email info@paragon-adv.com