Americans Are Living Longer, But What Does That Mean?

The Changing Realities of Retirement

Retirement is a relatively young financial concept. The idea that people would work for 30-40 years, then retire and live on their savings for another 15-20 years was impossible to comprehend before the 20th century. Even in the industrially developed countries of the late 19th century, most of the population didn’t live long enough or accumulate enough assets to make this possible. The first generation to experience modern retirement was born around 1900. In the U.S., this generation saw Social Security implemented during their early working years, rode the prosperity of the Baby Boom after World War II to steady employment and generous pensions – and then benefited from medical advances that allowed them to enjoy their good fortune for a longer time. It was a pretty attractive model, but in retrospect, the sample size was relatively small. As more Americans from successive generations approach retirement age, updated data suggests they are more likely to encounter new and daunting challenges to their financial well-being. Among the findings:

Americans are living longer, but not necessarily healthier, lives. Life expectancy has improved steadily, even in the past 20 years. According to a 2013 OECD (Organization for Economic Co-Operation and Development) report, U.S. life expectancy rose three years to 78.2 years in 2010 from 75.2 in 1990. However, the report also found the number of years of  living with chronic disability, an indicator of quality of life, increased as well. On average, Americans lived in good health (i.e., without short- or long-term disabilities), for just 68.1 of those 78.2 years. This gap of 10.1 years between total life span and a healthy life span rose from 9.4 years in 1990. An in-depth explanation of these statistics comes from a March 2014 study published by the Journal of the American Medical Association (JAMA). While medical advances have improved the outcomes for many life-threatening conditions like heart attacks, strokes and certain cancers, Americans have been slow to adopt better health habits that tend to ensure a longer quality of life. The prescriptions of “better diet, smaller food portions, increased physical activity, quitting smoking and better management of stress” are lifestyle issues that generally cannot be filled by medical procedures.

If you live to 70, there is a high probability you will experience a retirement "shock" on the next nine years.

In a November 2012 report from the Society of Actuaries and the Urban Institute titled “The Impact of Running Out of Money in Retirement,” the authors identified four “shocks” likely to disrupt retirees’ financial stability: severe disability, cognitive impairment, death of a spouse, or entering a nursing home. For 70- year-old men, the likelihood of one of these shocks was 67 percent. For women, it was even higher, at 76 percent. Any one of these events could cause significant disruption in retirement - physically, emotionally, and financially. So it is sobering to project that 2 of 3 men and 3 of 4 women will encounter these shocks in the decade after their 70th birthday.

As we get older, retirement increasingly becomes a women's issue.

Longevity and the demographic bump of the Baby Boomer will dramatically increase the percentage of Americans over 85 in the next four decades (see chart). Right now, women over age 85 in the U.S. outnumber men 2-1. Although demographic trends project the percentages will narrow a bit over the next three decades, the vast majority of older Americans are, and will be, women. If you combine this demographic imbalance with the findings about the gap between life span and healthy lifespan, as well as the likelihood of a retirement “shock event,” it results in a troubling conclusion: The realistic probability of elderly women having to manage their retirement finances by themselves – after experiencing a financial shock.

Shock Absorbers

Given the possibilities/probabilities of longer lives that include retirement shocks, it should prompt both retirees and those on the cusp of retirement (and their children) to consider protective financial measures.

Develop a team of assistants.

You may have done a great job managing your money and building your wealth over the past 50 years, but what happens if your “shock” is a cognitive decline? The probabilities of aging may require financial management to eventually become a group effort. And “group” probably doesn’t mean just one other person. A better way to protect your interests is by giving several parties responsibilities, in a checks-and balances format. This team may consist of family members, financial professionals, and trusted friends. The designations should be in writing – as part of power-of-attorney documents, or similar authorizations used by financial institutions.

As you get older, make it simpler.

Scientists who study cognitive decline identify two different types of intelligence – fluid intelligence (the ability to learn and process information quickly) and crystallized intelligence (your at-the-ready knowledge of your world). Some studies indicate fluid intelligence declines as early as middle age (45-49), but crystallized intelligence increases until around 65. To a great degree, crystallized intelligence compensates for losses in mental fluidity.

The same researchers determined that “financial literacy declines in later life and investment skills deteriorate sharply around age 70.” We can expect to retain comprehension of financial basics, because they have “crystallized” in our perceptions, but complexity and change may be problematic. A simpler approach promises less confusion and anxiety, and not just for you. Delegating complex financial decisions to someone else puts pressure on them to perform in your stead, a responsibility they may not be qualified for, or want to take on.

Make guarantees part of your program.

One of the attractive features of the “first-generation” retirement model was the (almost) certainty of a lifetime pension and Social Security payments. Although hindsight might argue the returns could have been greater if allocated elsewhere, those monthly checks provided a secure financial foundation for retirement. Regardless of the “shock” one might encounter, and the subsequent costs, these baseline financial items were not affected. Retirees can achieve similar baseline guarantees with insurance vehicles. Annuities can provide a lifetime stream of payments. And life insurance designed to remain in force can minimize or eliminate many of the financial and estate challenges encountered at death.