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Commentary on "The Cost of Living Longer -- Much Longer"

By Kevin Coppola
February 20, 2012
Source Article: http://www.smartmoney.com/retirement/planning/the-cost-of-living-longer--much-longer-1328897162395/#printMode


If you are like me and HATED Statistics in school – sadly the one class I had to repeat twice and ultimately drop in an otherwise stellar college career – then you will give yourself a massive headache reading the article by Charles Passy that appeared in SmartMoney magazine this past February.

So allow me to summarize for you. Mr. Passy addresses the answer to the age-old (technically 429 year since the first life-insurance policy was issued in 1583) problem of how long you can expect to live, or as my favorite Investment Risk Profile questionnaire asks, “When do you expect to DIE?” I don’t know about you, but I’m really concerned about what happens if I get the answer to that question WRONG!!

Of course, you’ve heard me lay out the simple solution that makes the need to answer this question irrelevant, and that is you must “Save enough during your working years so as to be able to replace your final salary with just the guaranteed interest on your savings.” And you can find that solution here.

But back to the article at hand…

Mr. Passy provides some idea of the magnitude of what the Compass Institute refers to as the “Investment Return Gap,” i.e., the difference between the amount of money you HAVE and the amount you NEED, when he lays out the total amount in the United States invested in investment sources like company retirement plans, IRAs, state worker funds, corporate pensions and Social Security versus the amount of money that will be needed by Americans during their retirement. The size of the problem has 14 – that’s FOURTEEN – zeros after it. That’s not even a number most humans can comprehend. Let it suffice to say it’s a problem that may not be fixable by any rational or socially acceptable means.

The author interviewed several experts in the area of human longevity, one of whom is Stephen C. Goss, the chief actuary of the Social Security Administration. When asked to categorize the people in America whose retirement strategies will lead them to have a financially secure retirement, he could think of just one; not one “category” but one person—none other than one Mr. William Henry Gates III, aka 2011’s wealthiest American.  Surely Mr. Goss was exaggerating because I have a hard time seeing Warren Buffett, Larry Ellison, George Soros, or the Waltons (the Wal-Mart ones, not the TV ones) facing a financial crisis anytime in their future. But nevertheless, the point is this is a severe issue faced by nearly every American and one that will only get worse without prompt attention.

So, unless you share financial stratosphere with Mr. Gates, etc., the author essentially sounds the alarm – as well he should – to the real problem of people outliving their money. The Compass Institute coined a phrase, Retirement Income Security Risk, meaning “the risk of running out of money before you die without a substantial reduction in your standard of living.”  This is a classic “good news/bad news” scenario. The good news is people are living longer due to advances in medical science. The bad news you are likely to end up needing far more money than you will have to live out those extra years, however there may be.

True, people will not live forever and as Alan Glickstein, a pension actuary with benefits consultants Towers Watson points out, “all things in the natural world are destined to stop growing sooner or later.” There are several competing factors at play.  Despite the fact there are 2,200% MORE centenarians in the US that there were in 1950, one third of Americans are classified as obese and therefore at risk for such life-shortening ailments as diabetes and heart disease.  But even if we were to put America on a much-needed diet, scientists would still have to come up with a way to slow the biological processes of aging itself, which experts agree may not be possible.

But since some of these concerns are not for our generation – or even the next – lets deal with today’s realities.  University of Illinois at Chicago researcher, S. Jay Olshansky concludes that “no matter what cures doctors discovered, humanity would hit a longevity wall -- with men and women, on average, reaching age 85 for the foreseeable future.” However, at the very least, say most pros, “It’s essential to plan financially at least through age 95 -- and if you have a history of longevity in your family, figure on surviving to the century mark.”

And, if you are counting on your current (or former) employer to help, you may be gravely disappointed as pensions continued to be depleted. And those government employees depending on state pensions may have it even worse. According to a 2010 study from the Pew Center on the States thirty-one states "have less than 80 percent of their pension obligations funded."

So the challenge to each of us is not to answer the question “How long can you expect to live,” (answer somewhere between 85 and 100) but rather answer the question “What am I going to do about it now!” The answer is to start taking an active investment approach to growing and protecting the one thing that you can control—your retirement plan.

 


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