Retirement Planning for an Older Population

People Are Living Longer

According to estimates published by the Office for National Statistics the average life expectancy for newborn girls is on course to reach just under 97 years and four months within just over two decades. Over the last 30 years human life expectancy has increased by almost a decade. The Office for National Statistics also mentions that the average life expectancy for females in the year 2057 will reach “the once unimaginable milestone of 100.” These projections are based on the average across the United Kingdom. If these numbers turn out to be true then governments and individuals should rethink how an older population will affect retirement expectations.

Portfolio Planning For A Longer Retirement

Millennials today are starting their careers later in life today than their parents or grandparents did. The Baby Boomer generation has began to retire and receive pension in recent years. As of now, the total debt held by the public in the United States is nearly $20 trillion. This could be a problem because it is higher than the previous 12 months of GDP in the country. Thankfully interest rates are still relatively low so the debt balance is still affordable. But we can expect to see the Federal Reserve slowly increase rates over the next few years.

With relatively fewer young people in the workforce, there will be less money going into pensions and sovereign wealth funds. At the same time we now have more people withdrawing money from their retirement accounts as the Boomers retire. So it is not surprising that some economists have expressed concern about the future sustainability of government benefits on the local, provincial, and national level – not just in this country, but all around the world. This is why many people worry that the Social Security benefits will be in jeopardy in the future.

“By 2030, about one-fifth of the U.S. population will be 65 or older,” writes Jane Wollman Rusoff, a contributing editor for Research Magazine. And the average Millennials could live up to 90 years old. This is why planning to retire at 65, which is currently the norm, may not be financially feasible for young adults today, unless a large sum of wealth is already saved up. For those who are planning to retire early, it can be even more difficult. So instead of planning to live until 80 years old, most healthy people my age should be aiming for 90 as the starting point. But also keep in mind that there is no set retirement age anymore, so plan to be flexible with work schedules to accommodate a balanced lifestyle.

Many investors use a common rule of thumb to help with their asset allocation. They simply hold a percentage of stocks equal to 100 minus their age, and put the remaining amount in fixed income assets. So for a typical 30 year old millennial, 70% of his portfolio would be in equities, and the rest (30%) would be comprised of bonds and other relatively safe investments. Determining stock allocation based on age is an effective strategy to gradually reduce one’s investment risk over time.

But as people live longer this 100 minus age guideline will no longer make much sense. So we can modify the rule to be more suitable for the current times. For example, we can increase the baseline to use 120 minus our age. Also, men have an average life expectancy of 80 years old in some developed countries, while women can expect to live to 84. Since women live about 4 years longer than men on average, they would probably have higher costs in retirement than men. This means ladies have an incentive to be a little more aggressive with their asset allocation, especially during their working years compared to guys, assuming all other factors being equal.

The revised 120 minus age guideline works well for me. I’m currently 30 years old, so I have 90% of my retirement in stocks and other equities. Meanwhile, the remaining 10% of my portfolio is in fixed income assets, including alternative investments such as peer to peer lending. The 120 minus your age rule isn’t right for everyone, but it’s a good place to start for those who are just starting out to invest.

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