How ‘healthy aging’ is extending our retirement-income horizons
by Angie O’LearyMs. O’Leary is head of wealth planning, RBC Wealth Management-U.S., a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC. Visit www.rbcwealthmanagement.com/
Healthier lifestyles and medical breakthroughs are stretching longevity, providing the gift of more years in better health for a growing number of American retirees.
According to the CDC, a healthy 65-year-old woman today can reasonably expect to live to age 87, while a healthy 65-year-old man can expect to live to age 83. For couples, there is a high likelihood that one spouse will live well into their 90s.
As Dr. Joseph Coughlin, Director of MIT AgeLab, has pointed out: “We’ve pushed out the longevity calendar from close to 50 years in 1900 to close to 100 today.”
This trend of longevity is only expected to continue. In fact, for young people today, living into a second century of life will not be uncommon. But with this gift of more time comes challenges, namely stretching personal wealth out over an extended period. For younger generations, this will likely mean working longer and saving more. For those near to or in retirement, it will require a level of agility and some new math.
And for advisors, increased longevity marks a new frontier in wealth planning – one in which our value proposition is no longer “how much can we help our clients make” but “how can we help make what they’ve made last.”
An Extended Planning Horizon Or Stretching Personal Wealth
This new frontier isn’t just the future – it’s essentially here.
With even the youngest of the 75 million baby boomers projected to be at full retirement age in just a brief decade, the landscape is quickly shifting away from the expected stereotype of the retirement of past, to an exciting new phase – one that could represent more than a third of one’s life.
The scale of the boomer generation is staggering, providing a great deal of economic power and influence. The norms they set will have both short-term ramifications and lasting implications for generations to come. “The coming generation of older adults have enjoyed the most dramatic quality-of-life improvement in history and will expect it to continue as they age, affording them new and innovative ways to live a longer, healthier life,” says Dr. Coughlin.
Advisors must be ready to help this new wave of clients who are living longer, healthier lives mitigate the stress of worrying whether their life savings will last.
One of the first steps we can take to do that is to extend the planning time horizon for clients. Unless there is a reason not to, such as a health or family history concern, pushing out life expectancy five-plus years in a wealth plan gives clients a much more accurate picture of their wealth span.
Family history may necessitate an even longer planning horizon. In my family, my father is living well at age 92. As a female, hopefully with a longevity bonus, I might put my “end of retirement” at age 97. In addition, research suggests that simply having a longevity mindset – planning and believing you might live to age 97 – can have a positive impact on your life expectancy. It can also help influence lifestyle choices and health-care decisions. For example, a knee replacement at age 80 might make more sense if you plan to be around 17 more years.
Another big part of planning for one’s wealth to last 30, maybe even 40 years involves examining the new cost not only of aging, but of aging well.
We know that healthy aging goes beyond physical health. Centurion research indicates that attributes such as purpose, socialization and cognitive fitness also play an important role in the quality of our later years.
Successful advisors must not only understand these factors, but also know how to account for these alongside other expected needs in a wealth plan. At RBC Wealth Management, our advisors work with clients to separate out their spending into goals that address needs, wants and wishes to help them better understand funding options.
Of the three buckets, “needs” will always be the largest. For most clients, the cost of lifestyle essentials (needs) will likely be similar to what is spent now, minus employment related factors. A general guide is to plan for 70-80% of pre-retirement earnings which adjusts-out retirement savings, taxes and employment related expenses.
However, those needs may shift over time. For example, the pandemic and extended work-from-home guidance provided a perfect lens for those nearing but not yet in retirement to see just how much spending patterns shift post-employment. In my case, my spending on gas, career clothing, parking, coffee and lunch have dropped dramatically. These lifestyle expenses typically continue to decline as clients age and are likely offset by an increase in health-care spending.
The Housing Wildcard
Housing and related expenses, which are a large component of the lifestyle spending bucket, can also be a wildcard – especially in the later years. Aging in place is by far the preference of most Americans, especially of late with health safety concerns in senior living communities. With that said, research suggests that very few can fully achieve this ideal with the average couple making three moves post retirement. Certainly, having a home that can better accommodate age-related independence should be a focus. The pandemic has accelerated an insurgent of doorstep, in-home, and technology services which should allow greater independence longer. Understanding other living options and related costs should be discussed and considered as planning scenarios, especially when discussing the need to age solo.
Having a separate health-care goal or need is also wise. Health-care costs tend to increase as clients age and are most expensive in the final years. The cost of health care is a top retirement concern and big-ticket line item. In fact, a healthy couple at age 65 can expect to spend over $500,000 out of pocket on health care alone.
Today’s financial planning software provides a very good estimate of age-based annual health- care costs specific to where a client lives and will typically use a higher inflation rate to project costs forward. If a client is retiring prior to Medicare eligibility, it is important to get a realistic handle on the full out-of-pocket costs, as it can be quite costly.
Once you have the big-ticket essentials identified, you can focus on a client’s wants and wishes. For many, that includes travel and leisure spending and gifting as well as those discretionary, but necessary, expenses such as expected home improvements and car replacements. As clients age, there will be shifts in spending—less travel in their later years replaced by increased spending on in-home services.
Another part of the longevity formula is managing risks. The two biggest financial risks are an extended bear market and an extended long-term care event. While neither of these events are controllable, we can help clients better prepare for them. We all have a fresh appreciation of volatile markets and the risk is real if we have to sell stocks in a down market. Remaining agile and having a flexible source of liquidity will help mitigate this risk.
An extended long-term care event can have a similar shock to wealth. As Medicare only covers limited short-term stays in skilled care communities, a prolonged stay or a progressive disease that requires ongoing daily living support such as an Alzheimer’s diagnosis can be financially devastating.
To help shine a spotlight on the rising prevalence of dementia and help families better prepare for the financial risks associated with the disease, RBC Wealth Management-U.S. commissioned a study, Preparing for the expected, the financial impact of cognitive decline, from Aon.
We’re also training advisors to have conversations with clients about how they would handle a dementia diagnosis or some other long-term care event and encouraging them to incorporate some level of protection, like long-term care insurance, into their plans.
Strategic Income Planning
Adding to the complexity of today’s longevity formula is figuring out how to replace that career paycheck with a retirement paycheck. Depending on the different types of funding sources and related taxes this can feel like a college calculus assignment.
Of course, Social Security will play a foundational role but it also comes with important decisions as well as tax considerations. With a new administration in the White House, tax and retirement policy changes add even greater variability to the funding calculus. Having a tax-considerate strategic income plan that is flexible and reviewed annually is the key. For under-savers, it will be a balancing act in managing spending to a realistic but reliable paycheck, annuities with a life-time benefit option might help manage the longevity risk.
- Key longevity planning strategies include:
- Extend client’s time horizon based on your clients health and family history
- Help clients understand the cost of health care and shifts in their spending
- Have a phased housing approach and know the various options in your community
- Have a plan to mitigate key risks; incorporate LTC scenario planning and LTC protection
- Help clients be strategic about funding sources and creating tax-considerate options
- Have a plan for the surviving spouse/partner
- Verify that estate planning essentials are in place with a special focus on wealth transfer where the client’s wealth span exceeds their life span
- For advisors, advance your expertise and your Rolodex of longevity related resources
From FAs to Longevity Coaches
While death and taxes are a certainty, planning for them is increasingly complex with today’s longevity bonus. To meet the evolving needs of clients as they age, advisors will need to be well versed in the principles of retirement planning and develop new skills. In many ways the role of an advisor will be that of a longevity coach. This will require us to better plan financially for an extended time horizon but also have the expertise and resources to help clients navigate this new era.