Coming fresh off another Easter holiday, I thought I would borrow a phrase from another popular bunny as a metaphor on longevity risk. Investment portfolio construction should consider and attempt to mitigate numerous risks including; market risk, interest rate risk, default risk, liquidity risk, currency exchange risk, and geopolitical risk. One risk however, that frequently is overlooked or poorly accounted for is longevity risk or the risk of outliving your available resources.

Longevity Risk

Both men and women’s life expectancies have been increasing steadily in the US aided by new medical technologies and greater understanding of health and nutrition, remember when smoking cigarettes was considered a cool and healthy habit? Yikes! Along with longer life spans means your portfolio has to provide income for a greater number of years, and typically without the assistance of an wage income. Investors today have to be mindful of an old generalization many advisors and planners still subscribe too that is: as you’re approaching and into retirement your portfolio should become conservative. If we look at that advice, yes, you may reduce market risk but you increase longevity risk by potentially reducing your portfolios rate of return and therefore the ability to keep pace with inflation and the spending needed to maintain the lifestyle one is accustomed to.

New Thinking

Too often I see planners adhering to the old method of placing conservative investments in client portfolios arbitrarily as they transition to retirement without considering longevity risk. I like the saying Bob Klosterman, CEO and founder of White Oaks Wealth Advisors, has been promoting around the office lately of “real portfolios for real people.” The reality is many people are using their portfolios as their main source of support to live their desired lifestyle. Therefore, the portfolio design needs to be tailored to produce income and keep producing income for decades into retirement while keeping pace with inflation.

How do you Mitigate Longevity Risk?

The answer is simple: your portfolio needs to realize a rate of return to keep pace with spending and inflation. The execution is much more difficult as careful consideration also needs to be taken in regards to the additional risks mentioned earlier. I like to think of reducing any one given risk is a science but it takes artistry to balance all the risks together to achieve an acceptable level that will support ones individual goals. I encourage you to think about the longevity risk aspect when allocating your portfolio and working with your financial professionals on developing strategies to keep your portfolio going, and going, and going.

The foregoing content reflects the opinions of White Oaks Wealth Advisors and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.

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