August 1, 2019 • Michael J. Nathanson, Dawn Doebler
There’s no denying that longevity is increasing in the U.S. and throughout much of the world. Recent legislation like the SECURE Act, passed on May 23 by the House of Representatives, is beginning to recognize this trend and the potentially far-reaching implications on society. One much-publicized provision of this bill is a proposed delay in the required-minimum-distribution (RMD) age from 70½ to 72. The bill also proposes a change that would allow IRA contributions for all workers with earned income, regardless of their age, along with rules requiring employers to allow long-term part-time workers to participate in company 401(k) plans. These changes are driven, in part, by expectations that greater longevity will result in more workers choosing and needing to remain employed beyond age 70. A potentially negative consequence of the bill (as currently proposed) is limiting the “stretch IRA” provisions to 10 years if an IRA is inherited from a parent or spouse. These changes are likely to impact clients’ financial plans and strategies for transferring family wealth. The bill’s recognition of greater longevity also begs the question, “How can financial advice better incorporate longevity risk planning in ways that are meaningful to clients?” As the Senate debates the SECURE Act, let’s examine some of the potential financial planning implications of longer lives and suggest ways to quantify and communicate potential risk to clients. Our goal is to inspire advisors to ask what actions to consider in response to the greater longevity we’re witnessing among clients and in society as a whole. Bearing Vs. Sharing Longevity Risk One of the more obvious challenges we face in retirement planning is that individuals are increasingly required to bear longevity risk. Previous generations enjoyed having longevity risk largely covered (or at least shared) with employers via lifetime income benefits from defined benefit plans. Today’s workers usually are not so fortunate. According to the U.S. Bureau of Labor Statistics, as of March 2018, on average, only 3% of full-time private-industry workers had access to a defined benefit plan. In comparison, 58% of these same workers only had access to a defined contribution plan. These figures show just how widespread the longevity risk shift is and the importance of our role in helping clients manage that risk to create sustainable retirement income plans. While the decline in defined benefit plans has been accompanied by greater access to defined contribution plans, like 401(k)s, there is little evidence that these new plans are adequate replacements. First, maximizing contributions can be challenging, especially given that workers face increased basic living costs, including higher housing and health-insurance expenditures. A study by MIT AgeLab showed 35% of student loan balances were held by individuals over age 40. Higher living costs and debt levels challenge employees’ ability to contribute up to the full legal limit of the defined contribution plan. Even if they can contribute the maximum amounts, many are challenged to accumulate enough outside those plans to adequately cover their longevity risk. Workers’ retirement account values also face greater market risk, both while they’re working and throughout a potentially much longer period of retirement. Consider a retirement that lasts only 20 years (say for a person’s life from age 65 to 85). It’s reasonable for investors to expect two or three bear markets during that period. That means the risk of losses or of getting shaken out of the markets is very real, perhaps even more so if the retirees don’t have the benefit of expert investment management to manage through down cycles. This risk is exacerbated by the very real prospects for lower capital market assumptions over the next several years. “Grey Divorce,” New Spouses Another result of people living longer is the increase in the number of “grey divorces.” While we may be living longer, some marriages aren’t lasting over couples’ extended life spans. The increased rate of divorce for individuals over age 50 reflects the decreased stigma in splitting, as well as the greater health and increasing economic independence enjoyed by women in this age group. First « 1 2 3 » Next
There’s no denying that longevity is increasing in the U.S. and throughout much of the world. Recent legislation like the SECURE Act, passed on May 23 by the House of Representatives, is beginning to recognize this trend and the potentially far-reaching implications on society. One much-publicized provision of this bill is a proposed delay in the required-minimum-distribution (RMD) age from 70½ to 72. The bill also proposes a change that would allow IRA contributions for all workers with earned income, regardless of their age, along with rules requiring employers to allow long-term part-time workers to participate in company 401(k) plans. These changes are driven, in part, by expectations that greater longevity will result in more workers choosing and needing to remain employed beyond age 70.
A potentially negative consequence of the bill (as currently proposed) is limiting the “stretch IRA” provisions to 10 years if an IRA is inherited from a parent or spouse. These changes are likely to impact clients’ financial plans and strategies for transferring family wealth. The bill’s recognition of greater longevity also begs the question, “How can financial advice better incorporate longevity risk planning in ways that are meaningful to clients?”
As the Senate debates the SECURE Act, let’s examine some of the potential financial planning implications of longer lives and suggest ways to quantify and communicate potential risk to clients. Our goal is to inspire advisors to ask what actions to consider in response to the greater longevity we’re witnessing among clients and in society as a whole.
Bearing Vs. Sharing Longevity Risk
One of the more obvious challenges we face in retirement planning is that individuals are increasingly required to bear longevity risk. Previous generations enjoyed having longevity risk largely covered (or at least shared) with employers via lifetime income benefits from defined benefit plans. Today’s workers usually are not so fortunate. According to the U.S. Bureau of Labor Statistics, as of March 2018, on average, only 3% of full-time private-industry workers had access to a defined benefit plan. In comparison, 58% of these same workers only had access to a defined contribution plan. These figures show just how widespread the longevity risk shift is and the importance of our role in helping clients manage that risk to create sustainable retirement income plans.
While the decline in defined benefit plans has been accompanied by greater access to defined contribution plans, like 401(k)s, there is little evidence that these new plans are adequate replacements. First, maximizing contributions can be challenging, especially given that workers face increased basic living costs, including higher housing and health-insurance expenditures. A study by MIT AgeLab showed 35% of student loan balances were held by individuals over age 40. Higher living costs and debt levels challenge employees’ ability to contribute up to the full legal limit of the defined contribution plan. Even if they can contribute the maximum amounts, many are challenged to accumulate enough outside those plans to adequately cover their longevity risk.
Workers’ retirement account values also face greater market risk, both while they’re working and throughout a potentially much longer period of retirement. Consider a retirement that lasts only 20 years (say for a person’s life from age 65 to 85). It’s reasonable for investors to expect two or three bear markets during that period. That means the risk of losses or of getting shaken out of the markets is very real, perhaps even more so if the retirees don’t have the benefit of expert investment management to manage through down cycles. This risk is exacerbated by the very real prospects for lower capital market assumptions over the next several years.
“Grey Divorce,” New Spouses
Another result of people living longer is the increase in the number of “grey divorces.” While we may be living longer, some marriages aren’t lasting over couples’ extended life spans. The increased rate of divorce for individuals over age 50 reflects the decreased stigma in splitting, as well as the greater health and increasing economic independence enjoyed by women in this age group.
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