For Physicians, the Greatest Threat to a Prosperous Retirement Is Longevity

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With advancements in the healthcare industry, Physicians employees should consider the likelihood that wealthy individuals will outlive the average lifespan. In light of this, it becomes essential for advisors to discuss longevity risk with their clients. The report found that women's 'longevity literacy' is greater than that of men, with 43% of women demonstrating strong knowledge of longevity compared to 32% of men. Annamaria Lusardi, director of the school's Global Financial Literacy Excellence Center and an economist at George Washington University, deemed it a 'striking result.' 'We may need to provide assistance to women because they are aware, for instance, that they live long but may not be aware of how to deal with their longevity.'

While Physicians employees may be concerned about stock market risk, inflation, and healthcare costs, research indicates that longevity poses the greatest threat to a retirement plan. The probability of running out of resources before the end of life determines longevity. Due to the fact that wealthy individuals are living longer than the general population, longevity risk is on the rise and there is a dearth of adequate income products to hedge this risk. In addition, according to a recent report from the Center for Retirement Research at Boston College, the longer you live, the greater your expenses will be. Fewer retirees have the lifetime income security of a defined benefit pension, and the calculation of safe withdrawal rates from portfolios can be difficult depending on economic and personal conditions.

For Physicians employees debating whether social security provides a measure of security, it is crucial to understand that it replaces a small portion of pre-retirement income for affluent households. These replacement rates are classified as part of the 1983 program reforms. With 33% of men and 50% of women in their mid-50s expected to live to age 90 or beyond, it is becoming increasingly important for advisors to consult with clients on longevity risk.

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Physicians employees should also consider how inflation is multiplied by longevity risk. Bill's grocery shopping in retirement, when inflation is constant at 3%, is an illustration of this. Today, Bill spends $100 on groceries; by the time he reaches his life expectancy, this amount will have increased to $222.13. His grocery bill at age 94 would be $257.51. It has increased by two and a half times since he retired. If Bill's retirement income did not increase, he would quickly seek ways to reduce his food expenditures. Inflation risk is multiplied by longevity risk, making Bill's retirement significantly more difficult. You can utilize financial strategies to reduce longevity risk, thankfully. Contact The Retirement Group to inquire about potential financial strategies for you.

The Longevity Discussion

When seeking financial advice, Physicians employees should consider a professional who values longevity. According to Surya Kolluri, the head of the TIAA institute, many advisors fail to engage their clients in a thorough discussion of longevity. Due to the 'uncomfortable' nature of the subject matter, advisors opt to use an actuarial assumption in lieu of a nuanced discussion about probabilities. New findings from the 2022 TIAA Institute-GFLEC Personal Finance Index survey reveal that only 37% of adults comprehend the meaning of longevity, with boomers reaching 44% and the silent generation reaching 45%, women reaching 43%, and men having a significantly lower rate of comprehension at 32%. Essentially, 'women are more likely than men to make healthcare decisions,' according to Kolluri. This suggests a connection to the topic of longevity and affords advisors the opportunity to communicate more effectively with couples about their lifespan. If the customer is a man, It creates an opening for the advisor to request a conversation involving both spouses on the subject, allowing for a more open-minded, attentive, and fruitful discussion. The TIAA-GFLEC study found a correlation between general financial literacy and retirement readiness and longevity literacy. Physicians employees should consider how retirees with limited knowledge of life expectancy have a lower likelihood of preparing for retirement while employed. They also demonstrated a lack of knowledge regarding retirement savings withdrawals. The longevity findings of TIAA are also consistent with historical trends. In 2020, the Center for Retirement Research in Boston published research comparing measurable and perceived risk. Risks assessed in the study included those posed by longevity, health care costs, stock market inflation, the need for family caregivers, and alterations in public policy. As opposed to longevity, the vast majority of individuals identified the stock market as the primary cause of a high degree of risk.

Social Security Applications

Physicians employees should also consider how longevity research presents an opportunity to reevaluate conversations with clients regarding the timing of social security claims. Most advisors approach this topic by conducting a break-even analysis, which determines the point at which total lifetime benefits would be equal to or greater by delaying a claim compared to the amounts generated by claiming earlier. Although break-even analysis is commonly used, Physicians employees may benefit from considering its flaws. One of the most significant is that nobody knows how long they will live. Social security break even analysis is a return-oriented analysis that obscures its value as longevity insurance. At advanced ages, relatively wealthy Physicians retirees can deplete their savings, making a maximized social security benefit extremely valuable. Physicians employees and retirees may benefit from considering that delaying benefits claims can be advantageous for the majority of households. In the past ten years, the majority of households have experienced positive trends. Fewer retirees file at age 62, and the majority of retirees have filed by full retirement age. Physicians employees should consider the fact that claiming FRA is worth 33% more in monthly income than claiming at age 62, and claiming at age 70 is worth 76% more. It is also important to recognize how the significance of delayed claims will increase over time. Social security is projected to replace a smaller portion of younger workers' pre-retirement income than it will for boomers and Gen-Xers. This is the result of the 1983 social security reforms, which raised the full retirement age from 65 to 67. The FRA for those born after 1960 is 67 years old. An increase in the FRA annually results in an estimated 6.5% reduction in benefits.

It is also imperative that Physicians employees consider rising healthcare costs. Due to rising values, early retirees may be tempted to file for Social Security benefits at age 62 in order to have more cash on hand before Medicare eligibility at age 65. Physicians employees should also note that opting for these reduced benefits to have money available sooner may leave them short in retirement. This is due to the inability of the permanently reduced payments to keep pace with the continuously rising medical costs. Individuals born in 1960 or later who begin receiving Social Security benefits at age 62 receive an estimated 30% less than those who begin receiving benefits at age 67.

Withdrawal Rates and Life Expectancy

When discussing safe withdrawal rates with clients, longevity is discussed with the objective of extending portfolio life throughout retirement. Regarding the rules of thumb for drawdown rates, this topic is extremely complex and provokes endless debates among retirement researchers. Morningstar's most recent study on safe drawdown rates recommends a starting rate of 3.8% for retirees seeking a fixed real withdrawal over a 30-year period. This value is significantly higher than Morningstar's recommended safe drawdown rate of 3.3% for 2021. The reason for this disparity is that stock valuations were lower last year, while bond yields increased. Morningstar also discovered that investors are more optimistic about the potential for long-term returns when stock prices are lower. From 2019 to 2021, when stocks were on a tear, return expectations decreased. Physicians employees must also understand how higher bond yields enable bond investors to construct portfolios with higher returns than the stock market. The fact that aggressive equity allocation does not improve safe starting withdrawal rates is another factor to consider. Although stocks have a higher long-term return than safer investments, volatility and the possibility of a decline in share price must also be considered. For Physicians employees, this perspective indicates that balanced portfolios produce the highest withdrawal rates. In essence, those contemplating retirement must be willing to adjust their spending up or down over time. Being flexible with retirement spending ensures that one's assets will last a lifetime, and upward adjustments allow retirees to enjoy assets that would be nonexistent under an inflexible spending system. When unsure of the appropriate age to begin receiving social security benefits, Physicians retirees may benefit from seeking financial advice from a professional. By contacting The Retirement Group, you can receive a complimentary cash flow analysis and speak with an advisor who will assist you in determining the best decisions to mitigate longevity risk throughout your retirement.

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