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Making Your Money Last

The Age of Longevity: How It Impacts Investing for Retirement

Longer life expectancies can mean more years in which you can enjoy retirement—particularly if you plan and invest well.

Longevity is on the rise, and that of course is very good news. Average lifespans in the U.S.—and those of developed nations as a whole—have increased by nearly 30 years from the early 1900s to the present.

But for many, maintaining financial independence for several decades post-retirement is a source of anxiety. Today, those reaching their golden years frequently have a greater fear of running out of money and becoming dependent on their children than they have of dying.

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At Halbert Hargrove, we’ve dedicated a great deal of strategic attention to the financial challenges that longevity presents. Increasing longevity is a critical consideration in how our clients should be investing and spending their money in retirement. And also how they, and their families, should view the long arc of their working lifetimes.Those who need to spend down their retirement assets will need to plan and invest with particular care. Here are a few key observations and tactics to keep in mind:

When Spending Down Assets, Beware of Portfolio Volatility A major challenge for retirees is the risk presented by the decumulation of assets during retirement. While people are still working and able to save part of what they earn, accumulation is still in play. But at some point, those living into their eighties or nineties often need to begin the process of spending down their nest egg—whether as the primary support in retirement or to supplement their lifestyle.

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In investment terms, decumulation is not just the other side of accumulation; it operates by a distinctly different set of rules. Importantly, portfolio volatility is particularly dangerous when withdrawing funds.

If you follow the markets, you already know that volatility (fluctuations in value in stocks and sectors) is now business as usual. Volatility can work seriously against your interests when you need to sell holdings at a particular time to fund something—such as your living expenses in retirement. The success or failure of your investments may depend on when the funds are required and what the markets are dishing out at the time.

Don’t Forget to Diversify Many of us face a long and uncertain period of expected decumulation in retirement. Because portfolio volatility poses such a high degree of risk in terms of the timing of draw downs (which is potentially something we can’t control), we place a large focus on diversification to reduce this risk.

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Effective diversification means that some assets will be underperforming at almost all times—while others are delivering positive results. The end result is usually satisfactory. When combined with a rebalancing discipline, diversification can significantly reduce risk, produce consistently higher returns over the long term, and help contain the damage of planned draw downs.

Our firm helps clients plan ahead to avoid having to make interim course corrections in spending. In basic terms, if you know you’re going to need to sell off some investments, you shouldn’t wait until the last minute—when the markets may be taking a sudden downturn. Investing in the Age of Longevity demands that we arrange our personal affairs for maximum control of circumstances out of our control—like market behavior.

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Monitoring Your Funded Ratio How can you know whether you can truly “afford” to help fund your grandkids’ education—or cope with unexpected expenses during retirement? We believe a great way to track the probability of financial security is through reviewing what we call the “personal funded ratio” on a regular basis. A funded ratio is essentially your personal assets ledger. It measures the present value of the resources available to you against the present value of claims against those resources. That’s right: assets v. liabilities. A funded ratio of 1.0 (1/1) means that these are in balance. A slightly higher ratio means you also have a cushion.

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We determine this ratio through a process that accounts for clients’ asset positions, other cash flows, and required/desired spending. Under very positive indications, our measurement tools help indicate when clients can safely distribute funds to family members or charities earlier than they initially thought possible.

The basic premise here is that assets -- or as we call them, “resources” -- include incoming future cash flows; liabilities or “claims” include both actual liabilities and other obligations and aspirations, such as helping support aging family members.

A Few Key TakeawaysIt’s essential to track your liabilities to clearly determine your funded ratio. For those who are relatively close to “1.0” in funded ratio terms, we utilize decumulation (distribution) management. We perform this by adjusting the allocation of investments to make the most of producing consistent cash flows and cope with longevity risk—while retaining maximum flexibility. Under this scenario, depending on how the markets perform and how your family circumstances evolve, you can still have options.

Have a backup plan. On the other hand, if unanticipated spending needs or market actions drive your funded ratio to 1.0 or below, you might consider hedging your longevity risk through purchasing an annuity. This kind of move is not inflation protected, but it’s better than having the bottom fall out of the future.

Longevity is really about the reinvention of long life. If your financial life in good shape, you can turn your attention to the business of living—and enjoying that gift of more time.

Russ Hill CFP®, AIFA® is CEO and Chairman of Halbert Hargrove, based in Long Beach, CA. Russ specializes in investing, financial planning and longevity-awareness solutions.

About the Author

Russ Hill CFP®, AIFA®

CEO and Chairman, Halbert Hargrove Global Advisors LLC

Russ Hill CFP®, AIFA® is CEO and Chairman of Halbert Hargrove Global Advisors LLC, an independent registered advisory firm based in Long Beach, CA. He has led the firm for more than 40 years, specializing in investing, financial planning and longevity-awareness solutions. Russ is heavily involved with Stanford University's Center on Longevity, and has helped to launch the Center's symposiums and Design Challenges on aging-related challenges.

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