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Investing for 100-year olds

Old age catches up with everyone. And it lasts longer now, too.

Every day you live, your life expectancy increases by six hours.

Incredible, eh?

The statistic comes courtesy of Duke University, who got it from playing around with life expectancy data from the past 170 years.

According to the demographer behind it, Professor James Vaupel:

“If young people realize they might live past 100 and be in good shape to 90 or 95, it might make more sense to mix education, work and child-rearing across more years of life instead of devoting the first two decades exclusively to education, the next three or four decades to career and parenting, and the last four solely to leisure.”

Vaupel also contributed to a study published in The Lancet in late 2009 that found that on current trends, most babies born after the year 2000 in the developed world would see their 100th birthday!

All great news for little Jimmy, but what does it mean for us as investors?

It’s one thing to eat well to get to old age with most of your teeth and a liver that’s fit for purpose. But what will you do for money?

Stronger, faster, more productive

I think most people radically underestimate the lifespan that – touch wood – lies ahead of them.

I’m the gloomiest person I know. I pretty much assume the environment will be trashed, and that the male genes on my father’s side doom my own old age (though both he and his father had appalling diets, and women in the generation ahead of both my parents routinely made it into their late 80s).

This is on top of assuming it will rain on bank holidays, that new films will be rubbish, and that I won’t win the lottery.

Yet despite my intrinsic pessimism, I always instinctively think long-term.

  • I keep fit because I want to be in reasonable shape at 50, not super buff next week.
  • It’s also why I’ve found it easy to save, and probably why I cope pretty well with bear markets.

Thinking long-term isn’t always the easy option. It would have been more fun to spend more money on more holidays in my 20s, instead of saving quite so much.

I also think I’ve hurt some people in my life, particularly women, by not being in a rush to ‘settle down’.

The thing is, marrying one person for life already seems a stretch these days. Doing so at 25 when you might live until 100? That seems – um – imprudent. If lifespan has doubled in the past 200 years, then surely our life expectations should change, too?

But few people think like this, in my experience. If the proverbial bus was actually hitting people at the rate implied by the vast ‘tomorrow may never come’ brigade I meet, then you wouldn’t be able to cross the road for flying bodies and blood-soaked public transport.

Of course, balance is the key – you don’t want to be a tightwad or to meet Miss or Master Right at 60.

But equally, life is long for most of us. So live like that.

Age ain’t nothing but a number

The reason we have a ‘pensions crisis’ as opposed to a ‘pensioner bonanza’ is because our existing system is essentially a Ponzi-scheme, built on the maths of an expanding workforce and an initial small population of old folk who didn’t have the temerity to hang around too long.

This crisis has been done to death in the media recently, not least with the official retirement age going up to 67 by 2020 and the Government mooting a universal State pension of £140.

Instead, let’s think about asset allocation and what our lengthening lives means for the retirement investing of the self-reliant types who I presume read Monevator.

There are really two main asset classes – equities and bonds (well, and cash, but that’s not a good long term investment). Everything else is a diversifier or a deviation of these two main classes, which boil down to volatile growth assets versus slow but steady fixed income assets.

Now, conventional wisdom is that you should vary your exposure to these key assets according to your age, where:

100 – your age = Equity allocation.

For instance, if you’re 60, you should have 40% of your assets in equities (100-60) and the rest in bonds.1

But does this ratio still make sense in a world of pre-schoolers innocently toddling towards the 22nd Century? There’s obviously no definitive answer, but here’s a few things to think about:

Inflation is your enemy

This is the big one. People retiring on fixed annuities at 60 could live to see their incomes ravaged as badly by inflation as arthritis does in their joints.

Inflation at just 3% will halve the purchasing power of your money in roughly 23 years. This might not be so bad if you’re a single man, particularly as some spending (though not care costs!) will fall as you age. But if you’re a 60-year old man with a 55-year old wife, she could really suffer when she outlives you by two decades.

Higher risk equals higher returns

All things being equal, you’d prefer to be in equities than cash or bonds. I am NOT saying you should have an unbalanced portfolio, or invest in a way you’re not comfortable with. But whether you want to pay for health care at 80 or leave more to your grandkids at 90, you’ll likely have more to play with if you take on more risk – i.e. hold more equities for longer – en route.

Income is more stable than capital values

People are mostly concerned with having an income in their old age. The good news is dividend income from equities is much more stable than their fluctuating capital values. Over the past ten years, the share prices of a basket of leading UK equity income investment trusts would have been all over the place, but the income they delivered would have increased every year.

Equity risk is related to time in the market, not your age

If you’re 50, you’re statistically likely to live for at least 35 years, and maybe much longer. That’s enough time to ride the ups and downs of stock market volatility. Don’t bet the farm, but equally don’t automatically assume you can’t hold any shares once you’re 65. You could have decades more of investing ahead of you.

More equities may mean you can save less

I’m not suggesting you should save less, if you can afford to save more. But if you’re 57, money is tight, and you’re thinking of shuffling your money into bonds ahead of retirement at 67, perhaps you should pause. In the worst case you may be able to work a couple of extra years or eat baked beans should equities slump. On the other hand, you’ve ten years to go – and over most ten-year periods, equities will beat bonds, doing the heavy lifting for you.

The number one priority is not to run out of money before you die. You can adjust by saving more or spending less – or by adjusting your exposure to riskier assets.

Not so shy and retiring

Finally, people are much healthier at 65 (or 67!) than they once were, and medical advances continue. At the same time, younger people in their 20s and 30s have grown up assuming they’ll have multiple jobs, and perhaps even multiple careers. Also, the ageing population means as older workers they will have less competition from young hotties.

As a result of all these factors, I think the idea of doing at least some work in your old age will seem entirely normal by 2030. That matters, because you can afford a riskier asset allocation if you’ve still got money coming in from elsewhere.

Bound by bonds

Given amazing statistics such as half of today’s kids living to 100, it’s almost impossible to believe that the French are striking because their retirement age is rising from 60 to 62.

They make us Brits with our crazy house prices and credit card addictions seem like hardheaded realists.

Yet in reality, we’re just as nutty. For the best part of a decade, the Government has compelled pension companies to hold more bonds and fewer equities, even as longevity has moved ever further ahead.

As Neil Hume wrote recently on FT Alphaville:

For a variety of reasons (two bear markets in a decade, the boom in liability driven investing and so on) pension funds and other institutional investors have slashed their weightings of equities and bulked up in bonds in the past quarter of a century.

But here’s the rub; these pension funds somehow have to deliver a return on assets of 6-8 per cent and it is stating the obvious to say that it will be challenging for government bonds, which offer a real yield of less than 2 per cent, to deliver that.

The numbers are stark: The percentage that pension funds allocated to all equities has slumped from 80% in 1992 to less than 50% in 2010. They’re buying bonds, despite a multi-decade time horizon and in the face of a probable government bond bubble.

This is crazy — pensions are surely the ultimate long-term investment for most people, and most people are living longer. I’d call it the next miss-selling scandal, except I can’t see Her Majesty’s Government investigating itself.

Of course, if you’re an economic doomster type, all this talk of getting older and richer is academic. Equities will be made worthless by the coming collapse of civilization. Better gather ye rosebuds while ye may – before the Chinese buy them all, or acid rain gets them.

The rest of us need to stretch our thinking a couple of decades further. Being old by all accounts has some severe drawbacks, but being old and poor compounds them.

Who knows, maybe you’ll end up a rich old super-investor!

And what if you’re one of the unlucky ones who gets hit by a bus, and so saved and invested for nothing? Ah well, no hard feelings. Money doesn’t buy happiness, anyway.

(Image by Wanderlinse)

  1. Sometimes you’ll see it as (120 – your age). This usually, and not coincidentally, happens whenever there’s a big bull stock market in play and everyone is keener on shares… []
{ 8 comments… add one }
  • 1 ermine November 4, 2010, 1:52 pm

    I’ve learned a lot of things from this blog, but if I’d have to cite one thing that really made a difference to my retirement planning it is being introduced to this

    Income is more stable than capital values

    somewhere in your investment trust articles

    Once I got that I have switched my targets to realise the income that I need. It is liberating, for the reduction of stress from the rollercoaster ride Mr Market offers. If I can buy an asset that will give me an income with a decent track record then I do so. This is where ITs work for me much better than my previous ETF approach, and indeed I have targeted rent-seeking among my non-financial assets too. You seem to need about 20-25k capital for every 1k of annual income you buy at the moment. In theory equity-backed ITs (and presumably a DIY basket of stable high-yielding boring companies instead, for the well-heeled) would hedge some of the ravages of QE derived inflation. I’m not so sure they’ll hedge resource conflict inflation, but there’s not much that will.
    .-= ermine on: Why do we make such a pig’s ear of housing in the UK =-.

  • 2 Salis Grano November 4, 2010, 10:23 pm

    My (workplace) pension company was busy selling equities all through 2008/9 into falling markets so that could lower their risk profile and now they intend to raise the contribution rate in order to keep solvent. Fortunately, I was buying all through that period.

    When I retire (early) next year, I intend to keep active in the markets. It makes life more interesting and, I agree, it’s a better bet for the long term than other investment classes.
    .-= Salis Grano on: Farewell to Speenhamland =-.

  • 3 The Investor November 4, 2010, 10:53 pm

    @ermine – Comments like that make this whole blog worthwhile, so thanks for that. I know what you mean about your mindset shifting when you start to focus on income instead of capital. (Did you ever read my post about how the number most people should focus on in my view should be annual income, not capital?)

    Obviously as ever nothing is guaranteed… people with under-diversified directly held portfolios of blue-chip shares found first banks then BP slashing or halting income in the past couple of years. Indeed, one reason I’ve not really returned to my HYP series is my mindset has shifted about on direct shareholdings for income. I still think it is viable, and possibly even superior given there are no annual costs, but I think the savaging of blue chips in recent years shows it is more effort to monitor than it first appears, and also the outcomes are too distributed across different investors. For most people, a basket of high income ITs is a better solution IMHO, especially if you can grab them when they’re on a discount! 😉

  • 4 The Investor November 4, 2010, 10:56 pm

    @Salis – Thanks for sharing, that must have been so frustrating. I guess bonds did fairly well in 2008 at least, and 2010, too.

    I wouldn’t want people to come away from this post thinking I’m saying load up on equities whatever your age and sell everything else (not saying you’re saying that – just reflecting). I’m really saying that people in their 40s and 50s – or indeed any age – need to make sure they’re thinking with a sufficiently long time horizon when they make *any* decisions.

    Congratulations on your imminent retirement. Definitely agree with your aim of keeping busy. A big turnaround in my thinking in the past few years is that while I still aspire to be financially free to retire, I hope to at least do some work (even a couple of days a week consulting or angel/mentoring or similar). I’m not at all sure retiring 100% cold turkey is healthy.

  • 5 Mark November 5, 2010, 9:14 am

    Hey Monevator

    “I’ve never been in debt because I’ve known I’m only borrowing from my future self” – A friend of mine, justifying his spending and on the assumption he’s going to one day be rich, likes to propound that he’s just the “present value of his future self”!

    I agree with understanding the expanded time horizon, knowing which asset class is going to be doing the heavy lifting and shifting capital appropriately, but also important would be emotional preparation for the ride. For many people, a bumpy and fluctuating portfolio in their 50s may be difficult to swallow and stick with, and we don’t want them pulling their money out at the wrong time…
    .-= Mark on: Spotlight announces free service release =-.

  • 6 The Investor November 6, 2010, 8:25 am

    @Mark – Thanks for your thoughts. True enough about the danger of a sudden withdrawal, and while you could say that about asset classes at any time it is clearly more potentially ruinous when your horizon for recovery has shrunk. Then again, part of my point is that 50, say, isn’t as old as it used to be.

    Definitely more of a discussion point then a set of precepts though.

  • 7 ravenser November 6, 2010, 4:45 pm

    Another excellent article.
    ‘…it might make more sense to mix education, work and child-rearing across more years of life…’ Exactly. Its clear that traditional retirement is dead, and our failure to recognise this lies at the heart of the pension crisis. Having a more flexible and adaptable attitude to life, in terms of work, career and career breaks is the solution, and is far more rewarding.

    As a side issue, why don’t we teach personal finance in schools ? How many graduates today could explain the difference between a share and a bond ? If people are to take responsibility for their future, we need to provide them with the knowledge to do so at a young age.

  • 8 The Investor November 7, 2010, 8:46 pm

    @ravenser – I’ve even met people who work in banks (I mean investment banks, not your local branch of Halifax) who don’t really know exactly what a share is. (They know it’s different to bonds etc, but they don’t really understand the underlying mechanisms, or valuation ratios such as P/Es etc).

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