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4 Longevity Mistakes to Avoid Portfolio Matters | Christine Benz

The first step in addressing longevity risk is to eval- uate just how great the odds are that either you or your spouse will have a much longer-than-average life span. Health considerations, family longevity history, employment choices, and income level may all be factors. In fact, 40% of adults underestimate their longevity by five or more years, according to a Society of Actuaries survey. If you’ve assessed these considerations and are concerned about longevity risk—or if you’ve deter- mined that you’d simply rather be safe than sorry— here are four key mistakes to avoid. Mistake 1 | Holding a Too-Conservative Portfolio When investors think about reducing risk in their port- folios, they often set their sights on curtailing short- term volatility—the risk that their portfolios will lose 10% or even 20% in a given year. But a too-conser- vative portfolio—one that emphasizes cash and bonds at the expense of stocks—can actually enhance shortfall risk at the same time it’s keeping a lid on short-term volatility. That’s a particularly important point these days, given the fact that current yields tend to be a good predictor of returns from these asset classes. Not only are starting yields meager in absolute terms—the 10 -year Treasury bond is yield- ing just 2 . 6% and certificate of deposit yields are barely more than 1% (if you’re lucky)—but interest rates also have much more room to move up than they do down. That will reduce the opportunity for bond-price appreciation during the next decade. With returns like that, retirees with too-safe portfo- lios may not even outearn the inflation rate over time. That doesn’t mean longevity-conscious retirees should jettison these safer investments, as they provide valuable ballast for the risky portions of a portfolio. It does, however, suggest that those concerned about outliving their assets should shade their portfolios more toward equities than would be the typical prescription for people in that same age band. That means an equity allocation of more than 50% , even for those getting close to and in the early stages of retirement. It also means healthy doses of foreign stocks as well as U.S. stocks. (If you find your portfolio is extremely light on stocks right

A few years ago I attended the 100 th birthday party for a family friend. Following a round of toasts and tributes, this never-married, lap-swimming cente- narian treated her admirers to a rousing song-and- dance rendition of “Yankee Doodle Dandy.” And she wasn’t alone on the dais: Her older sister, a former member of the Women’s Army Corps, joined her. These two are the only 100 -year-olds I know, but they’re not all that unusual anymore. In fact, the number of centenarians in developed countries is increasing at a rate of more than 5% per year. At that pace, the population of individuals aged 100 - plus will double every 13 years, according to the United Nations’ World Population Aging Report. insurers and other financial-services providers notwith- standing. Just 5% of 65 -year-old females and 3% of 65 -year-old males will make it to age 100 , according to Social Security actuarial estimates. But a much larger percentage— 29% of 65 -year-old males and 39% of 65 -year-old females—are expected to live to age 90 , according to Social Security statistics. Such longevity is often cheered as an achievement, a tribute to individuals’ gene pools, healthy lifestyle choices, and advances in health care. And rightfully so. But the downside of living well beyond one’s average life expectancy is that it can strain—or worse, completely deplete—an individual’s financial resources. With more baby boomers entering retire- ment without pensions—meaning that Social Secu- rity is likely to be their only source of guaranteed life- time income—longevity gains heighten the risk that more individuals will outlive their investment assets. Of course, it’s still a fairly small subset of the popula- tion that will live that long—scare tactics from