The New Finance Of Longevity

Planning For An Extended Retirement Timeline

What was once a short term solution can now stretch over 40 years

by Andy Moore, CFP®

Mr. Moore is VP of advanced planning and portfolio solutions for The Quantum Group, USA, LLC, an independent distribution company, in Scottsdale, Az. Visit learn more.

With 10,000 people in America turning 65 every day, we’re living in an era of increased longevity, with more clients living to age 100 and beyond. In recent decades, the percentage increase of people living to age 100 has grown more than that of the overall population. For your clients, living longer creates opportunities—but also financial risk.

While previous generations’ long-term retirement plans may have been for 10 to 15 years, now clients need your help to develop financial plans to fund what could be 40 years of retirement.

For advisors working with retirees, longevity impacts retirement by exacerbating all retirement risks. Let’s take a look at some of the issues as well as risks that insurance and annuities can help mitigate.

Guaranteed Retirement Income

In an economic climate rife with market volatility, where few companies offer pensions, and headlines question Social Security’s solvency, people are seeking safety and guarantees not provided by their 401(k) accounts or equity investments.

According to a study by Nationwide, 55% of consumers said Social Security will be their main source of retirement income, but even your most affluent clients will rely on Social Security for at least a portion of their monthly retirement income.

When you analyze which sources of retirement income provide guarantees other than the federal government, which runs the Social Security program, there are really only two: insurance companies and banks.

For consumers, the guarantees provided by insurance companies are second only to those provided by the Federal Deposit Insurance Corporation, especially because some insurance companies have existed and been solvent for hundreds of years.

But what makes annuities and insurance products so critically important to the retirement plan today is that with interest rates at historic lows, annuities and insurance can generate higher guaranteed returns than FDIC-insured guaranteed options offered by banks. Even if the Federal Reserve raises interest rates, increasing the returns on CDs, savings and money market accounts, insurance companies will likely keep pace by providing higher returns on their policies.

Health Care and Long-Term Care Risk

Health care and potential long-term care costs are two of the top financial challenges for retirees, and according to Nationwide research, 78% of consumers expect their financial professional to provide advice on planning for health care costs in retirement.

While the conversations with clients around health care and long-term care can be uncomfortable, they’re an essential part of longevity planning. As people get older, health care and long-term care risks get higher.

Mistakenly, many retirees assume Medicare alone will cover their retirement health care expenses. In reality, studies by Fidelity show that for a couple who’s reached age 65, Medicare premiums, deductibles, co-pays and other out-of-pocket medical expenses can total as much as $300,000 in retirement.

And importantly, long-term care is not covered by Medicare at all after 100 days. According to Genworth, the average nursing home stay in America costs almost $95,000 per year for a semi-private room. The only option to paying for long-term care is Medicaid, which requires a burdensome spend-down of assets, virtually bankrupting a healthy spouse in some states.

While the conversations with clients around health care and long-term care can be uncomfortable, they’re an essential part of longevity planning. As people get older, health care and long-term care risks get higher...

Annuities and life insurance products have addressed health care and long-term care risk by adding policy provisions or optional riders that create living benefits and income if the policyholder develops either a terminal illness or a permanent disability that requires long-term care.

Unlike traditional disability or long-term care insurance policies—with premiums paid out for years for nothing if the dire health possibilities don’t become reality—these coverages kick in only if they are needed, leaving other benefits in place if they are not.

Addressing Market Risk

It’s incumbent upon all advisors, including advisors who manage assets and investments, to help their clients address market risk, especially those with less retirement assets saved. Living longer makes market volatility a greater risk to retirees.

The clients who tend to be best suited for annuities and insurance solutions generally don’t have enough assets amassed to generate enough income to live comfortably throughout retirement, nor can they withdraw money for income during stock market downturns without risking that they will run out of money at some point. They often rely exclusively on their savings, meaning they need protection from factors threatening their monthly income like sequence of returns, inflation, market and longevity risks.

The 4% rule (or 3% or 2%) can be a disaster for them if they must withdraw income from equity accounts during market downturns and volatility like we have recently seen due to Russia’s invasion of Ukraine.

With interest rates at historic lows, the idea that bonds will generate enough fixed income for retirees is not realistic either—bond funds in particular have been found to be correlated more to markets than they were in the past. Even if the Federal Reserve does raise interest rates several times in 2022, as they said they would do before the Ukraine crisis, bonds are not the answer for retirement income for the smaller investor with a lower retirement portfolio value.

Protecting Spouses

Longevity affects couples. Too many retirees still don’t realize that when one of them dies, the lowest of the two Social Security checks stops coming in, potentially putting the survivor’s lifestyle at risk. Couples need to make sure that, regardless of who is left behind and for how long, they can live comfortably.

Statistically, women have a higher chance of outliving their spouse. Annuity and insurance can help close the gap and address spousal risk by providing joint ownership options and/or tax-advantaged wealth transfer.

Using Insurance and Annuities in the Overall Portfolio

Increased longevity is fundamentally changing the way financial professionals help their clients prepare for and live in retirement. It’s important to start having longevity conversations early—while clients are still accumulating assets in their portfolios—so that they can begin thinking about the financial implications and impacts of a longer life.

In other words, insurance and annuities don’t replace 401(k) plans, equities, stock market investments or AUM, but along with Social Security, they provide guaranteed, baseline retirement income that a client can live on without touching their portfolios during market downturns. Retirement clients who have created a guaranteed stream of income, and who also have investments in the stock market, may choose to consider holding on to their equities longer during their retirement years—insurance and annuities can make it possible.