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Be Careful: You Might Live to 150

As a financial planner, I am more inclined to notice insurance ads than most. But I suspect Prudential’s current marketing campaign is catching the eyes of all sorts of people.

Prudential’s ads have the “wow” factor that really makes people stop and think. Specifically, the campaign does a fantastic job of making the public aware of a key, underappreciated financial risk: living longer than you expect.

If you have not already seen the campaign in your daily life, you can check out examples on Prudential’s website. Some of my favorite surprising facts include:

The first person to live to 150 is alive today.

The number of 100-year-olds will double by 2020.

Babies born today are more likely to live to 100 than to have blue eyes.

I do not doubt the accuracy of these statements, but without context they may seem more shocking than they deserve to be. As with most advertising, when you dig deeper, you realize that the insurer’s message and the objective truth may be a bit different.

Although there are no 150-year-olds alive today, there will almost certainly be at least one within the next 150 years. While I would bet that no one reading this column will live to 150, it is worth considering that you might live significantly longer than you expect. Life expectancies continue to increase. As a result, it is no longer the norm that retirement is a relatively short period of time. A retirement that lasts more than 30 years will likely be even more commonplace in the future. Retirees need to plan their finances accordingly.

Prudential’s ad campaign wants people to ask “How should I plan for a longer retirement?” because the insurer has a particular answer in mind. While I agree that the question is valid, it is worth examining the answer from a more objective point of view.

Palisades Hudson makes it a defining point of our business culture to always act in our clients’ best interest. Not only is it an internal rule, but putting our clients’ interest before our own is also mandated in certain instances. When our CERTIFIED FINANCIAL PLANNER™ professionals provide financial planning services, we are required by the CFP Board’s Rules of Conduct to act as fiduciaries to our clients. As a Registered Investment Advisor, Palisades Hudson Asset Management is required by the SEC to be fiduciaries to our clients when its staff provides investment advice.

Sometimes putting the clients’ needs first leaves us on the side of conventional wisdom: We recommend that clients maintain a cash reserve, max out their retirement accounts and maintain adequate life insurance coverage. Other times, however, our positions are more controversial. We tend to steer our clients away from expensive alternative mutual funds or long-term care insurance. We also prefer term life insurance over whole life insurance in many cases, and generally tend to limit insurance policies to pure insurance, as opposed to including an investment component. This is because we find that when insurance products are blended with investments, they often have high costs. While adequate insurance coverage is a necessity in a well-structured financial plan and we routinely recommend it, it still might sometimes seem as if we have it out for the insurance industry.

In truth, we are neither consistently for insurance providers nor against them. What about in this case? Is our answer to longer retirements the same as the solutions insurance companies like Prudential may offer?

While every client is different, we believe that a balanced portfolio of stocks and bonds is almost always the best way for individuals to meet their retirement objectives.

We typically recommend that clients maintain at least five years of expected portfolio withdrawals in conservative investments. This provides them with a margin of safety in case stock markets decline. We also believe that all clients need to have some exposure to stocks. Although stocks are one of the most volatile investments in the short term, they have proven to be one of the only ways to outperform inflation over the long term. Retirees tend to underestimate their investment time horizon. Shying away from risks too early can have a profound impact on your portfolio in the later part of retirement. This is where the question “What if you live longer than you expect?” comes in to play.

Especially in today’s interest rate environment, a portfolio cannot earn enough to maintain a retiree’s standard of living if it is exclusively invested in bonds. With the prospect of a longer retirement, it is now more important than ever that investors maximize their portfolios’ long-term returns while staying within their personal risk tolerances. While an annuity or insurance product may be an appropriate component of an individual retirement plan, an investor should carefully evaluate each product to confirm that it fits with his or her overall goals and that the truth of the product’s particulars matches the marketing.

Whether with an insurance product or another asset type, it is vital that all investors fully understand their investments in order to make sound planning decisions. A client came to us with an annuity contract that had a guaranteed income benefit of 7 percent annually, which sounded good on paper. However, the 7 percent guarantee that the insurer marketed only applied during the accumulation stage of the annuity, a 10-year period. Once the contract began paying out over the next 20 years, the insurance company began to use a 2.5 percent interest rate. Therefore, over the entire 30 year period, the client’s actual return will be much lower than the advertised 7 percent. This type of caveat, usually buried deep in the nuance of a prospectus, makes financial planners skeptical of insurance products.

At Palisades Hudson, we are also generally skeptical when investors are asked to lock into a specific product for the long term, as is often the case with insurance products. While securing a given rate of return may seem appealing, selecting a product with limited flexibility means it will be difficult for you to respond to changing market conditions. Although interest rates and inflation are currently quite low, this situation will change.

While ensuring an adequate return on investment assets is essential, there are two other important pieces to the retirement puzzle. Unfortunately, neither is fun. First, retirees should consider working longer. They can delay retirement, continue to work part-time, provide consulting services in their areas of expertise, or start an entirely new profession. Continuing to earn income has the obvious benefits of prolonging contributions to, and delaying withdrawals from, a retirement portfolio.

This leads to the final component of planning for a long retirement: carefully examining your spending. A common question clients ask financial planners is “How much do I need to retire?” The answer is that the figure depends on your level of assets, market returns, other income and expenses. Holding all else equal, a $5 million portfolio might be sufficient for one client and inadequate for another because of differences in their living expenses.

Some people mistakenly predict that when they retire they will reduce their daily expenditures, since they will no longer need to pay the costs of commuting, continuing education and other work-related expenses. However, don’t underestimate how cheap your job is compared to other potential uses of your time. Working keeps you occupied and prevents you from spending money. Unless you plan to sit at home idly once you retire, your expenditures may not shrink as much as you expect. If you fill those hours with skiing, concerts, shopping, travel, or a variety of other hobbies, your overall living expenses may actually increase.

When thinking about your spending, you should be sure to account for added travel and leisure costs during the first part of your retirement and higher medical expenses later. While the classic advice of eating in or skipping a daily latte can have some benefit, you will see more effective results if you focus on the major areas where you can cut expenses rather than making changes that are essentially minor. Are you ready to downsize your home? Are you interested in relocating to an area with a lower cost of living or lower taxes? These are some of the big decisions, and they can have a material impact on how well you live in retirement. Retirement planning should involve not only maximizing your assets, but also thoughtfully considering how you will spend those assets.

Kudos to Prudential for creating a compelling marketing campaign. The company is doing a great job educating the public about the need to save for a longer retirement. I fully endorse their method of discussing the problem; just don’t confuse that with a full endorsement of their solutions.

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