By Kevin Keating
When it comes to retirement planning, many things have not changed. Year after year, the same challenge seems to keep clients up at night: they want to ensure they’ll have sufficient funds to weather the uncertainties of retirement.
However, some things have changed over the past few decades. Perhaps the most influential is life expectancy and the unique challenges of planning for a longer retirement. Health care costs and family dynamics also continue to evolve, and advisors must be prepared to help their clients’ retirement planning strategies change with the times. The tools and tactics that ensured happy retirements for baby boomers may not hold true for Gen X and beyond.
Building a Portfolio to Last
When it comes to building an investment portfolio built for financial freedom in retirement, foundational principles remain crucial across each phase of life. Young investors should increase their risk tolerance while retirement remains a long-term goal. While increasing risk may seem like a hard move today given the length of the bull market, we advise clients to use new additions to their portfolios as a way to add to higher return/risk assets like equity and alternative assets over time. Doing so removes the emotional impact of trying to time the market and allows investors to dollar-cost average their positions into the ever-changing market landscape. They should understand the importance of starting retirement savings early and maximizing all potential vehicles for long-term growth.
Many investors focused on retirement in the near future may want to miss out on some potential upside in order to minimize downside. I refer to this as asymmetric risk tolerance and often recommend it to clients approaching retirement. The nearer investors get to retirement, the more crucial it becomes to ensure their portfolios are not overexposed.
Planning for Longevity
The same instruments and approaches that have benefitted retirees for generations still hold true and, in fact, are more important than ever as life expectancy has increased substantially over the past few decades. Life expectancy in 1950 was around 66 for men and 71 for women. Today, those numbers in the U.S. are 76 and 81, respectively.
As clients plan to maintain their lifestyles in retirement, that means not only accounting for current expenses, but also for the impact inflation will have on those expenses. Help clients plan for expenses to be greater than they anticipate. As a result, financial planning exercises result in conservative outcomes. Inflation, the general increase in the price of goods and services over time, is a critical input in financial planning. The input costs to our lives (for example, energy, food, housing, etc.) increase over time with inflation. Portfolio allocations need to be constructed to take into account inflation-adjusted goals as a key consideration.
While people are living longer lives, that also means that health care considerations become a much larger part of planning conversations. At the same time that life expectancies have increased, so too have health care costs. These facts add layers of complexity to retirement planning. Similar to the way we plan for inflation in living expenses, so too do we incorporate the reality of regularly increasing health care costs. Clients should plan for higher expenses in their financial plans attributable to longer lives and increased health care costs.
Annual health care costs continue to rise. Currently, the median cost of home health aide services in the wealthiest areas of the country is estimated at around $67,496 annually and is expected to reach $163,000 annually in the next 30 years. Likewise, the median cost of nursing home care in that region ranged from $109,777 to $139,795 last year. In 2048, the cost for a private room is expected to exceed $330,000. Planning for retirement means planning to maintain a comfortable lifestyle. Advisors and clients must factor in all of the elements that will affect that—health care chief among them.
Increasingly, advisors must help their clients consider potential inter-generational influences on their retirement plans. Advisors can play a crucial role in helping clients understand the impacts parents and children can have on retirement plans.
Part of this role may include multi-generational education. Advisors must be willing to help clients feel confident that their children will be equipped with the tools to safeguard inherited wealth and earn their own.
Advising the next generation early and often has implications for both generations’ retirement goals. Among mass affluent clients, adult children may rely on parents financially for longer than either party anticipated. This can mean tapping into retirement savings too early or burning through retirement savings faster than planned.
Meanwhile, many high-net-worth and ultra-high-net-worth clients are acutely concerned about not burdening their children. In my experience, most seek to strike a balance of ensuring that their children will be safe, secure and well taken care of when parents are no longer around, without overindulging them and inhibiting their abilities to be self-sufficient.
The most common retirement planning mistake I see is giving away too much money, too early. While estate planning is an essential part of retirement planning, advisors must help clients determine the right timing and cadence to leave a legacy they’re proud of without sacrificing their own financial security in retirement.
Likewise, most high-net-worth individuals value charitable giving as a major component of their retirement plans. Advisors can work with clients to make sure they give high-impact gifts at the right time and frequency to make the most impact for the beneficiaries and to maintain their own retirement goals.
The principals behind financially sound retirement planning have not changed, but new challenges and influences must be considered. From longer lifespans, to unpredictable inflation rates, to rising health care costs, to adult children who require more time to find their financial footing, planning for retirement requires more than just sound investments. It also requires a consideration of outside factors that can threaten a well-built portfolio along the way. As financial advisors, our role is not just in investment strategy, but also taking a holistic look at clients’ goals and creating a realistic picture of the trials that may come along the way.
Kevin Keating is a partner and investment officer at Mill Creek Capital Advisors.