Statement shock is the beginning, but longevity may be clients’ biggest risk

We are a couple of weeks away from 401(k) and IRA statement shock based on the performance of the equity and fixed-income markets. Advisers who have clients who are long retired, (who doesn't?), clients who decided to take the retirement plunge during Covid or those who are approaching that moment may want to talk, and do some deep thinking and calculating.

If you’re an American turning 60, you can now expect to live for just over two more decades — more than 16 years of that in relatively good health. That’s fantastic news for all of us who want to spend more time working, creating, traveling and connecting with the people we love, but it’s not without a cost. Longer lifespans increase the chance that your clients will outlive their money or have to drastically downgrade their lifestyle. A recent survey by the American Advisors Group found nearly one-third of advisers’ clients believe that they will live long enough to run out of money.

I believe every adviser should discuss longevity planning with their clients. Wealthy clients need assistance in ensuring they can fund their current lifestyle and leave a legacy. Upper-middle and middle-class clients must protect against outliving their money. They too want to leave something for their kids and grandkids. What’s more, as a society, we may need to address larger issues like how to preserve a social safety net for older citizens, including health care and housing assistance.

Record inflation numbers have focused everyone’s attention on the importance of preserving purchasing power, but people in the last several decades of life face even higher costs than these top-line indicators suggest. During the pandemic, health care costs have increased by around 2% to 3% per year, far less than energy prices. However, labor shortages and supply chain issues affect health care, too, and many analysts believe an increase is inevitable. Meanwhile retirees, just like everybody else, are paying more at the pump and more at the grocery store. In short, regardless of your client’s background and health care needs, costs increase with age. Income that’s sufficient now may not cover expenses 15 to 30 years in the future.

You may have heard that life expectancy in the U.S. has declined. Indeed, heart disease, cancer, diabetes, obesity, opioids, suicide, smoking and vaping, and environmental degradation have cut into the last century’s gains, subtracting around 1.5 years from U.S. average life expectancy. Unfortunately, like everything else in the United States, the losses were distributed unevenly along racial, social and economic lines. Yet many Americans, including many who are wealthy enough to likely have an adviser, aren’t prepared for a multidecade retirement.

Sources of retirement income have changed dramatically. After corporate America declared a war on pensions in the 1970s, most retirees now derive the majority of their post-working income from Social Security and self-directed 401(k) and individual retirement accounts.

Longevity is a big factor in how well individuals can fund a financially secure retirement, and, to some extent, financial security determines longevity. Superior financial savings generally allow people to reside in less polluted areas, fund lifelong health care and have general awareness about a healthy lifestyle.

The risk-oriented question, “How long will you be in retirement?” was always a mask for “How long do you plan on living?” and calculators took note.

Science and socioeconomics are extending lots of people's lives into their 90s. Many of these groups rely on their financial adviser to address and solve this issue. It seems reasonable to retire at 65 after working 40 or more years. However, if you live to be 95, you will have to fund expenses for another 30 years with only passive income. Asset allocation to de-risk in one’s late 50s may actually be far off the mark of what is needed.

A couple of years ago, I attended a golf event (I don’t play) where I had lunch with an NHL Hall of Famer. Before we ate, his handlers urged me privately to pay for lunch and insist if I had to. This legendary player would be stretching to pay the tab in this upscale venue. Inflation and longevity can hit everyone.

Inflation, volatile equity markets and low interest rates all contribute to these challenges. Retirement income must more than keep pace with expenses to grow principal to keep up with inflation over decades. This is another role of the financial adviser.

I hear my peers joke about how long they’re paying some expenses for adult children. This is no joke. The “sandwich generation,” which is caring for elderly parents and children of all ages while trying to save for retirement, will come to dominate headlines, replacing current references to the great wealth transfer.

More than 10,000 people are retiring each day. Advisers play a key role in their future, as do asset managers, insurance companies and society as a whole.

At my age, I am hoping we are all recognizing the challenge.

Andrew Corn heads E5A Integrated Marketing, a systematic, data-driven investor acquisition agency, and is a former CIO and ETF designer.