Good news for those aiming for long life: Folks over 100 are the developed world’s fastest-growing demographic.[i] A phenomenal statement about human progress! But with longer life expectancy comes greater financial need.
A recent World Economic Forum (WEF)[ii] report highlights the issue. It estimates the average American 65 year old has enough savings to cover only about 10 years of retirement, despite a 20-year life expectancy (and rising),[iii] with similar shortfalls in other advanced countries. By 2050, the WEF warns, there will be a several hundred trillion dollar global retirement savings shortfall.
Now, we have a few quibbles with these visions of a global retirement crisis 31 years from now. For one, such long-term projections are inherently dodgy, regardless of their source. It is impossible to account for all the variables that could change during a decades-long window, likely in ways no one can imagine today. But also, we are only talking averages here. Everyone’s circumstances differ, which renders straight-line predictions about individual people’s situations even less certain the further forecasters extrapolate.
The assumptions underlying this study also seem off. A biggie: It doesn’t include Social Security in America or other countries’ public pension systems. In the US’s case, adding back in Social Security—which on average replaces around half of a person’s pre-retirement income—might very well mostly cancel out the looming “retirement crisis.”[iv] Quibble with Social Security’s future payouts, but they probably aren’t going to zero. When faced with previous funding deficits, politicians grabbed the proverbial third rail and patched Social Security’s finances—preserving most current retirees’ benefits—by edging up taxes and age eligibility slightly, as well as shifting the cost of living adjustment calculation. They can do so now, perhaps by raising the retirement age once again, which would jibe with longer lifespans and many people’s tendency to work longer.
That said, the WEF makes a useful point, in our view: Many investors increase their own retirement risk by being overexposed to cash and other “safe assets.” As the report says: “One of the biggest risks to a retiree is outliving their savings (once some retirement capital has been built up). While saving consistently is critical, earning a return on savings also has a substantial impact on retirement outcomes.” This shows why “safe” is a misnomer. No asset is really “safe” if holding it means you run out of money before your time. Often, simply getting your principal back—even with interest—won’t cut it. Long-term capital appreciation is generally necessary to help offset inflation and a lifetime’s worth of withdrawals.
The WEF suggests placing a greater proportion of savings into “return-seeking assets,” e.g., stocks—rather than “lower return-seeking allocations,” like bonds—could go a long way toward relieving peoples’ potential retirement savings gaps. The report also offers countries some advice on how to help this along, which isn’t our bailiwick. On an individual level though, for those nearing retirement, we would note there is nothing keeping you from enacting your own personal retirement plan to ensure you have enough financial resources through your later years (or beyond if you consider leaving a legacy). Critical to this, in our view, is having an accurate understanding of investment time horizon—the length of time your assets need to be invested to reach your goals.
Folks frequently gravitate to bonds and other low-volatility assets in retirement because they think avoiding loss is paramount once they have stopped accumulating and started taking distributions. We think this misunderstands the tradeoffs between owning stocks and bonds and how those evolve as time horizon lengthens. Many presume their investment time horizon ends at retirement, rather than stretching over an entire lifetime or beyond, depending on their spouse’s age, beneficiaries and long-term goals. But with two decades likely ahead of the average American at retirement, long time horizons give many retirees significant flexibility to own stocks and pursue a growth-oriented investment strategy.
Yes, stocks are volatile in the short term, but over time, this volatility evens out, and even bear markets fade. For those with time horizons of 20, 30 years and longer, stocks have historically delivered the long-term growth necessary to close the kind of gaps the WEF documents. Stocks have returned 10.8% annualized since 1925, including bear markets, and have never been negative over a 20-year stretch.[v] Longevity works in stocks’ favor.
Historically, the longer you are in stocks—the longer your time horizon—the smoother and more consistently positive returns get. Over 5-year rolling historical periods for example, stocks averaged 10.0% annualized, but their standard deviation—measuring the degree of fluctuations in historical returns—was 8.7%.[vi] The uncertainty around the average return, over five years, was big. In contrast, bond returns averaged 5.3% over a 5-year time horizon—about half stocks’ average—but with only a 4.0% standard deviation;[vii] a much higher likelihood for hitting its average. Stretch your time horizon out to three decades though, and the variability reverses. Over 30-year rolling periods, stocks averaged 11.1%, but with just a 1.3% standard deviation.[viii] Bonds? 5.5% with a 2.7% standard deviation—more than double stocks’.[ix] Stocks’ returns fluctuated much more than bonds’ in the short run. But in the longer term, they deviated from their average less often and featured much higher returns.
Capturing these long-term returns requires discipline—building up enough savings to invest, then investing and staying invested enough to capture stocks’ long-term returns—letting your assets grow with you as you age. But with care—and time—wealth can multiply.
Increasing life expectancy makes having sufficient retirement funds ever more imperative. By investing and focusing on long-term growth, a longer life can be what it should—a blessing.
[i] “World’s Centenarian Population Projected to Grow Eightfold by 2050,” Renee Stepler, Pew Research Center, 4/21/2016. https://www.pewresearch.org/fact-tank/2016/04/21/worlds-centenarian-population-projected-to-grow-eightfold-by-2050/
[iii] If Social Security’s actuarial tables are anything to go by, life expectancies could bump up another few years by 2069. Or, if medical science keeps advancing, perhaps a lot more! “You’re Probably Going to Live a Lot Longer Than You Think,” Ashby Daniels, MarketWatch, 6/20/2019. https://www.marketwatch.com/story/youre-probably-going-to-live-a-lot-longer-than-you-think-2019-06-20
[iv] “How to Create A Worldwide Retirement Crisis, Using This One Simple Trick,” Andrew Biggs, Forbes, 6/14/2019. https://www.forbes.com/sites/andrewbiggs/2019/06/14/how-to-create-a-worldwide-retirement-crisis-using-this-one-simple-trick/
[v] Source: Global Financial Data, Inc. S&P 500 total return, December 1925 – June 2019.
[vi] Ibid. 5-year rolling returns from 12/31/1925 – 12/31/2018. Stock return based on the S&P 500 Total Return Index.
[vii] Ibid. 5-year rolling returns from 12/31/1925 – 12/31/2018. Bond return based on Global Financial Data’s USA 10-Year Government Bond Index.
[viii] Ibid. 30-year rolling returns from 12/31/1925 – 12/31/2018. Stock return based on the S&P 500 Total Return Index.
[ix] Ibid. 30-year rolling returns from 12/31/1925 – 12/31/2018. Bond return based on Global Financial Data’s USA 10-Year Government Bond Index.
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