How Changing Life Expectancies Should Alter How You Invest During Retirement

One of the more confusing issues faced by those moving closer to their retirement years is just how to invest during those later working years, as well as in actual retirement. There persists the dated advice that once you reach that general point in your life, all of your investments should be very conservative: traditional bank vehicles, US Treasury instruments, high-quality bonds, those sorts of things. What makes that idea so dated? Americans are living longer. As society continues to evolve in all of the ways it can evolve, one of the byproducts of that evolution is that humans are able to hang on to life here on Planet Earth for many more years than they once could. One of the challenges, however, that accompanies a longer lifespan is figuring out just how we’re going to be able to pay, during our retirement years, for the expenses that are a natural part of existing.

The average life expectancy of an American born in 1930 was about 60 years of age. The life expectancy of an American born in 1960 was about 70. For Americans born today, the average life expectancy is pretty close to 80 years of age. The age that we’ve come to look at as being standard for retirement is 65, and yet the person born in 1930, at least in the year of his birth, was generally considered to be dead well before even reaching the age that we now regard as the minimum for retirement. For that person, then, the idea of having to plan for retirement was either not taken too seriously, or at the very most, if he was interested in planning for retirement, he could justifiably assume that his saved monies need last only a few years after he stopped working. For him, it was probably OK to look to low-paying but very stable vehicles as a place to put his money, because, ultimately, he didn’t take seriously the idea of being around for too many years after he stopped working.

Now, however, with average life expectancies inching right up to the 80 number, the prospective retiree has to consider living for 15 years past the age of retirement. This doesn’t even take into account the notion that an average life expectancy is just that, average, which means that a whole lot of people will live well beyond 80.

Let’s assume, for the sake of discussion, that you retire at 65 and live to 85, which is by no means an unreasonable assumption. That means that you have to be able to finance the last 20 years of your life through whatever paltry sum offered up by Social Security, as well as by whatever you have working for you separately in retirement accounts.

20 years is a long time. Even if you have $500,000 accumulated by age 65, investing that in nothing but very stable, low-paying vehicles (let’s assume an average yield of 3%) would mean that you would realize only about $15,000 in interest per year. So, unless you are prepared to dip into principal as soon as you retire (not a good idea), you’ll have to be prepared to live on about $1,250 per month. Sure, Social Security could make up some ground for you, but the future of that benefit is uncertain, to say the least.

In the end, therefore, assuming you’ve not accumulated millions of dollars by the time you stop working altogether, you have to be willing to accord a significant portion of your savings, even during retirement, to growth-oriented investments in order to ensure you don’t outlive your monies. The overriding costs of living many years after the cessation of work, combined with the complicating factors of inflation and the expenses associated with chronic health care, means that you can no longer count on the yields offered by CDs and Treasuries and other similar kinds of vehicles to sustain you from the time you stop working to the point of your death. Stay invested in growth equities with a portion of what you have. If you are particularly good at selecting your own basket of stocks, then do it; if you don’t trust your abilities as a stock picker, stay with a good portfolio of mutual funds and/or exchange-traded funds that will give you access to the overall market while also keeping you diversified and lowering your overall risk. Alternatively, if you would prefer to speak with a fee-only financial planner about your situation before doing anything (never a bad idea), then do that. The point is, we should all have a greater awareness of how longer life is changing the paradigm of investing during retirement, and adjust accordingly.

James L. Paris and Robert G. Yetman, Jr. 
Christian Financial Planner

None of the information contained in the above article is intended to be, nor should be construed as, a solicitation or recommendation to buy or sell any security, or engage in any financial transaction whatsoever. It should be noted that, at any given time, the author(s) may or may not own any of the securities or other financial products mentioned in this column. Furthermore, it is strongly suggested that you seek the advice of an appropriate financial professional before making any changes or implementing any decisions with regard to your personal financial profile.