Longevity Risk

Welcome to Mr. Stillman's Opus, featuring John Stillman, the founder and the president of Rosewood Wealth Management. John, awfully good to be back with you. It's a little awkward when you're standing up and I'm sitting down.

Normally we're both seated for this. Today you're standing up and I feel, I don't know, I feel like I'm in a business meeting and I'm wearing a t-shirt and everybody else is in a suit. You're intimidating me.

You're so much taller than I am, so I decided to stand up for a change. Fair enough. Just to make us on a level playing field here. I see. But let's talk about longevity today on the show. Everybody seems... Which you have a lot of so far. Yes, I do.

I do. I've been around a long time and I hope to be around a lot longer. Everybody seems to want to live for a very long time. So why don't we talk about longevity risk? Why is it risky to live a long time? Well, it is kind of ironic, right, that companies are pouring tens of thousands, if not hundreds of thousands of dollars into making you live longer. I mean, human longevity has been something that people have strived for for a very long time. So you have all these companies that part of their whole thing is how can we make people live longer and be healthier? And there's one company, I don't remember who it is, but they're dead set on life expectancy being 100 years old for humans.

So that's the thing that exists. So why do we talk about longevity risk? Well, anytime we poll listeners or people in classes or anybody who's approaching retirement about what is their number one fear, time and time again, the number one fear is what? Running out of money, outliving your money.

Right. And so if you live a long time, well, that's what makes it risky. So, for instance, pretend like we're going on a road trip and we have a car that's, you know, kind of in need of repair. Hasn't had the oil changed in a while.

Fan belts are loose, might have some low air pressure in your tires, and you're going to drive this car from here to California. Putting a little risk into that trip. Right. Now, if we're just driving from here to Saxapahaw, it's not as big a risk. Yes, the car is not ideal, but if we're only driving to Saxapahaw, we can probably make it.

Okay. Well, you can see the same thing if you're going into retirement and you're 65 and you have maybe questionable plans in terms of how well your overall retirement plan is constructed, but you're only going to live until 70. Well, it's probably not that big a deal. You probably have enough money to last you five years, but if you're going to live till 95, that's 30 years we have to fund. And if you don't have a good plan set up, well, that's where the risk comes in. Well, you know, we've been doing these shows for a long time and I've heard you say before that longevity is a risk multiplier. Explain what you mean by that.

Yeah. So let's say you've done basically risk multiplier means it exacerbates and really makes obvious any poor planning that you've done in other areas. So let's say you didn't really account for inflation in your plan and you retire needing $5,000 a month to live on. Well, by the time you're in your late 80s, you're going to need $10,000 a month just to have the same buying power.

It's kind of scary. So if you didn't plan for that, that's a very obvious, I mean, your buying power has been cut in half 25 years down the road. Again, if you only live five years, yes, inflation would still exist, but you probably wouldn't really notice it. It would just be creeping up in those five years to the point that it wouldn't really stand out to you. If you haven't done a good job of healthcare planning and let's say you end up in some kind of Alzheimer's care unit for a significant number of years.

Well, that's costing a lot of money. And again, if you were in the Alzheimer's unit for a year or two, that would be one thing. But what if you're there for 10 or 15 years? Because a lot of times physically your health can be fine.

It's just mentally you need the help. And so that can last for a really long time. You can be one of those very expensive facilities for a significant number of years. So again, the longer you live, the more it exacerbates all of the poor planning that you did or didn't do.

I know you talk with a lot of people all the time. You have new people coming in that sit down and talk with you about their own retirement and their hopes and dreams. And my question is, how effectively has the average person out there addressed these financial challenges that can come with longevity? Well, not very well for the average person. I mean, for the people who have addressed it well, it's usually by accident.

Right. So maybe they have a really nice pension and that's going to be a lifetime payment and they're fine. You know, that along with their Social Security and, you know, even if they spent through everything else, they still have so much money coming in each month that they're fine with that that base income.

You know, I know a lot of people who are currently not necessarily clients, but maybe parents of clients. I mean, they say their moms in their in her 90s. And I always ask, well, are you going to be responsible for helping take care of her in any form or fashion financially? Or is she OK? Oh, no, she's fine. She didn't really have any money, but she has my dad's pension. So she gets thirty five hundred dollars a month from that plus her Social Security. So she's fine. So there are people who are well set up to address longevity risk, not necessarily because of great planning, just because they happen to have the pension in place. Yeah. OK. Well, one more question here today.

We're talking about longevity risk on this edition of Mr. Silman's Opus. And John, tell us about somebody who came to visit you primarily. They walked in the door and they told you, John, I'm afraid of running out of money.

I'm scared to death that's going to happen to me. What did you do to help this person? Well, so I'll give you a recent example. Somebody came and they had a portfolio of around a million dollars. They wanted about nine thousand dollars a month as a gross income in retirement. So there was a very small pinch in there, maybe about five hundred dollars a month. And husband and wife both had Social Security. So between those three income streams, we were going to be at about about four thousand dollars a month between his Social Security, her Social Security and the small pension. So obviously we have a big gap to fill and we don't want to just pull six thousand dollars a month off of that million dollar portfolio and hope that there is a pile still left when they reach the end of their life. Because then if they do run out of money, they're down to only the four thousand a month. Social Security and the pensions plus whatever cost of living adjustment they've got on that over the years. So what we ended up doing was we took one piece and put it into an annuity that was going to pay them a lifetime income.

As long as either of them are alive, it will pay out. So we put enough into that that it was going to give us a thousand dollars a month from retirement to the end of life. We put another chunk in a market based income portfolio where we're just focused on creating dividends and interest. But the rule is with that account, we're never going to sell anything. We're never going to sell shares of anything. We're just going to take the dividends and the interest off of that portfolio. We're just going to take the eggs.

We're never going to kill the chicken. OK, so as the market is up and down, yes, we can have some fluctuations and what those payouts are, but we know that we're never selling anything. So we're never going to draw that down to nothing. We're just going to take the dividends and the interest in perpetuity. And then with the rest of it, well, that was our growth bucket where, you know, we have a piece that's growing for five years and we're going to draw that down. And then that's going to let us move to the next piece, which is invested a little more aggressively.

And we're going to draw that down until we move to the next piece. Well, if everything goes completely wrong with all of those market based buckets, we know at the end of the day, we're still going to have two Social Security benefits, a small pension, the thousand dollars a month from the annuity and whatever we're getting off of the income portfolio. That's going to be enough to pay for their basic lifestyle. Now, within 95 percent probability, they're not actually going to run out of money in those other buckets, too.

But let's pretend like they did. Well, now we know that they have a base there that they're more comfortable with. Now, instead of four thousand a month as their base, it's more like six thousand dollars a month coming in as their base income, regardless of what happens with everything else.

And so you kind of have to decide, well, what's my number that I'm comfortable with that I must have coming in? And for them, they said, all right, six thousand dollars a month indexed for inflation. We feel pretty good about that as our base.

No matter how long we live, we can at least pay the bills on that. Seems like there might be a lot of different moving parts there. Well, there are. And it can sound confusing when we're just talking about it verbally, but usually when people see it visually, see it all mapped out, it makes a lot of sense. And so, yes, there's some sophistication to it, but it's not so complicated that you can't understand it in a 30 minute discussion. So, you know, I think it's important to understand that it's not that hard to get some of these things in place for yourself.

All right. Well, there's some thoughts on longevity risk. As always, John Stillman has lots of thoughts in his head about what your retirement can be like, how you can get to where you want to go. And if you like to get in touch with John at Rosewood Wealth Management, you can arrange a time to come in and sit down and have a conversation.

Kind of a getting to know you session. It is 800-545-2991. That is 800-545-2991. You can call or text. I'm Ron Stutz, along with John Stillman, your financial retirement planning strategist and financial coach for The Triangle. This is Mr. Stillman's Opus.