A general rise in life expectancy has been the focus of many a conversation among wealth managers and their clients of late, regardless of how far the clients may be from planned retirement. The Business Journal’s Jane Yu asked local wealth management firms what longevity means for them and for their clientele. Here’s an edited version of their responses.
Marc Foster
Managing Director, Foster Wealth Management, UBS Financial Services Inc., Newport Beach
Sixty is the new 40. No one smokes, and Whole Foods is a mob scene. The baby boom generation is blessed with health awareness and likely longevity. But there could be a problem: We have contributed more to personal trainers, Massage Envy and Orange Theory Fitness than to our 401(k)s.
For many individuals, reality will be marked by gainful employment into their 70s. I fully predict that it will be commonplace to be employed and productive well into our retirement years, partly because it will be a necessity for so many.
In my financial practice, we are fortunate to work for a client demographic that is largely self-supportive, yet have different financial demands that we help meet. Being self-sufficient is of primary importance while maintaining one’s lifestyle. Many of our clients also are responsible for their parents, as well as for their kids.
All of the necessary financial decisions confront us as interest rates and return assumptions hit new lows. Throw in a normal inflation factor and a longer life span, and the financial planning models start to blow up.
We plan as if our clients live indefinitely. Once we can illustrate what is really needed to cover all contingencies, then we talk about how much they can rationally give away.
Nick Givogri
Director, Merrill Edge, Newport Beach
Many Americans are living longer, and a healthy person who retires at 65 today can reasonably expect to live another 20 years or more. With breakthroughs in medicine and healthy lifestyles, especially in Orange County, where there’s a great emphasis on healthy living, residents will need more money for retirement than ever before.
It requires thorough, thoughtful planning to put away enough money to live your desired lifestyle in retirement. But it mostly comes down to a handful of options—work longer, save more money, or take a riskier approach to achieve a better return. We know retirement is top of mind for a lot of people in Orange County, according to the most recent Merrill Edge Report. Nearly 60% of Orange County respondents intend to follow the first option by retiring later than anticipated. That’s [an 18%] increase over the results of the Merrill Edge Report in spring 2013.
Retirement income isn’t the only topic that needs to be addressed. For instance, the rising cost of healthcare can quickly erode your retirement lifestyle if you don’t account for it. After seeing their parents age and live longer than expected, many baby boomers understand their parents weren’t completely prepared. Now those boomers are even more concerned about making sure they have enough income to last while staying engaged in retirement and ensuring that they aren’t a burden to their children.
Merrill Edge addresses the need for more planning, especially among the emerging “mass affluent,” by providing research, tools, and guidance to help investors manage finances and start meeting financial goals sooner.
Andi Kang
President, Crown Wealth Management, Costa Mesa
When people talk about risk in the context of their wealth, they are usually thinking of the day-to-day movements in the market. There is potentially more dangerous type of risk that needs to be addressed: the risk of living longer than planned and saved for.
For wealth managers, this is an opportunity to educate our successful clients on how to live a long life well. We teach our clients to seek proper counsel, spend wisely, save consistently, avoid debt and consider giving back generously.
Some action items that we encourage to help our clients mitigate longevity risk include optimizing Social Security lifetime benefits, using fixed and guaranteed investments that provide lifetime income, setting realistic expectations of time horizons, and careful planning and coordination with tax advisers.
Many people take their benefits too early. Waiting until age 66 or even age 70 may provide a greater lifetime income if one spouse has a better-than-average life expectancy. Annuities, pensions and some types of bonds can provide guaranteed income for life and in certain instances can be an important hedge on outliving your money.
A conversation about realistic time frames is necessary, and careful planning is essential to the overall success of a plan. The preservation of the portfolio through the years can be assisted by protecting wealth from unnecessary taxes. This can potentially be achieved by utilizing tax-advantaged accounts, trusts and other estate planning techniques. And once an individual has a financial plan in place, implementation is of the utmost importance.
There are many forms of wealth that are vital to the overall success of a family, including family values, traditions and legacies. Being intentional with our planning and intentional with our family communication helps us to be faithful in the stewardship of all our resources and treasures.
Sean O’Keefe
Retirement Planning Specialist, Burnham Gibson Financial Group, Irvine
While it’s great we’re living longer, that also means as advisers we need to reframe our thinking about retirement income planning for our clients. In facing the reality of this trend, we as wealth advisers need to make sure we’re educated and prepared. Many of us have increased our level of education to understand better the planning and forecasting aspect of advising clients as opposed to the specific investment recommendations.
Advising a client to take Social Security benefits early, at age 62, may not be the best idea. Rather, we need to consider delaying to full retirement at ages 66 to 67 or even age 70 if possible. By waiting to receive retirement benefits, they will receive a higher payout for life.
Also, to supplement savings or Social Security, we need to consider an income annuity with a lifetime payout. Annuities have a range of features and benefits and are not suitable for everyone, but they can provide a steady stream of income during retirement.
Moreover, medical care and long-term care expenses can destroy a retirement income portfolio. Medical advances help us live longer, but also increase the likelihood of at-home care or (care) at a nursing home—costs that continue to rise at a higher rate than inflation.
Forecasting various investment and income scenarios and showing these to our clients have become even more important as the possibility of one living past age 90 is real.
Dryden Pence
Chief Investment Officer, Pence Wealth Management, Newport Beach
Longer life expectancy can increase two significant risks. The first is being retired much longer than expected, therefore increasing the amount of money needed for distributions over time. The second risk is that healthcare costs for long-term care and unplanned or uncovered medical expenses during retirement can significantly increase living expenses each month or all at once.
In either case, the size of the portfolio has to be much bigger to begin with, and what it earns during retirement has to be greater than what’s provided in today’s low interest-rate environment. The choices are often to increase equity exposure in the portfolio to have the opportunity to increase the total assets from which to draw, and/or to increase the amount of insurance and annuities.
We believe that the risk of the cost of long-term care is the single biggest risk to someone’s retirement plan. It is a risk that can be far more devastating than a market meltdown. We recommend plans that provide for “longevity buckets” to try to match the risk with a way to mitigate it. The plan includes items like an immediate annuity that you can’t outlive, a deferred annuity that you turn on if needed, or an annuity that has a long-term care rider.
Increasing longevity means that the old ratios—those that prescribe a 60% allocation in fixed income, for instance, or have the fixed-income percentage of your portfolio match your age—may no longer work. People should seek professional advice in re-evaluating the balance.
Winnie Sun
Founding Partner, Sun Group Wealth Partners, Irvine
At Sun Group Wealth Partners, we begin addressing long-term care and planning with our clients as soon as possible. Many of our clients are only in their 40s and 50s, but it is never too early to begin, especially since many of these affluent families are already caring for an older family member and assuming some long-term care costs.
With longer lives, the need for astute and holistic estate planning is key. As a firm, we believe in understanding our client’s goals—both personal and professional. We also get to know each client and their family, and we’re not shy about presenting hypothetical questions and scenarios oriented around longevity and care. Our clients share with us personal goals and how they live, which allows us to truly customize their estate and financial planning needs.
When it comes to risk assessment, we work with a variety of industry professionals to get a gauge on costs for longevity-related expenditures, such as long-term care, wellness visits and assisted living. This helps us project anticipated long-term care costs, inflation-adjusted, to our clientele. If I could encapsulate our ethos of estate planning and long-term care, it is always to make sure you are covered for those later years. I’d rather advise a client to be prudent with expenditures now than to have limited resources in their autumn years. Health-related expenses tend to increase with age and are ones you never want to skimp on.
Mark Van Mourick
Chief Executive, Optivest Inc., Dana Point
As people live longer, they need to save more before retiring and/or retire later to ensure they will have enough funds to last. Exacerbating this extended time issue is the unusually low interest rate currently paid on savings vehicles and residual damage from the recent worst-in-75-years recession. Both require a larger retirement savings buildup.
The weak economy has often meant that many near-retirement couples have either underemployed children living back at home or possibly aging parents that are also living longer. Both of these situations can require additional income to support. For our mostly high-net-worth clients (with over $10 million), these same issues apply but with less consequences to current lifestyles and more challenges to long-term legacy planning and funding.
However, longer time frames also have advantages, mainly the compounding effect of long-term business and real estate holdings. Many times, allowing an extra five to 10 years of asset growth before tapping it for retirement income can more than overcome the additional capital drain of extended lifetime withdrawals. Furthermore, we have found that in most cases, full retirement in their 60s is not as fulfilling as many people had hoped. Healthy, productive people require some mental stimulation and a reason to get up in the morning.
