The Myths of Longevity and Purchasing Power Risks

Marilyn Brohm |

Most of us have heard of the so called phenomenon called “longevity risk.” According to the NAIC, National Association of Insurance Commissioners, longevity risk refers to the risk that actual survival rates and life expectancy will exceed expectations, resulting in greater-than-anticipated retirement cash flow needs.

My question is: what risk? I ask this because longevity isn’t a risk at all. It’s a stark reality. As financial columnist Nick Murray stated, “It is what most sharply distinguishes the baby boomers – the youngest of whom will turn 50 on New Year’s Eve, while the oldest hit 68 this past New Year’s Day – from the generation that came before them. Longevity is the defining fact of the balance of their lives.”

Gallup’s recent polling found the average retirement age in the United States to be 62. The joint life expectancy of the average non-smoking man and woman of that age is 92. Those of you who have and continue to take good care of your health might live past 92.

Moreover, to the extent that we are able to accept our above average life expectancies, the easier it becomes to begin dispelling the corollary myth: that of “purchasing power risk.” The erosion of purchasing power via inflation over longer time horizons is not a “risk”. It is unfortunately a historical reality of the first magnitude.

Let’s look at some examples us baby boomers know to be true. The average price of a movie ticket in 1984 was $2.50. Today a ticket to the Guardians of the Galaxy at AMC Town Center 20 is $7.58. This is nearly a 300% increase in 30 years or a 3.77% annualized increase since 1984. The average price of a gallon of gas was $1.10 in 1984. Even with the recent decrease of gasoline this month, the average price is around $3.00 which is nearly an increase of 300%. A pound of Red Delicious apples cost about $.43 in 1984 and today the average cost is $1.40.

Then we come to health care costs. According to the Bureau of Labor Statistics, medical care inflation has averaged 5.2% since 1982. In other words, what cost $1,000 for medical care in 1982 costs about $5,064 today.

Assuming as we must that we will live longer and pay more for goods and services, what can we do to prepare ourselves for these realities? 

Basically we have two meaningful options of where to invest our hard earned savings. We can loan it to someone or we can own something. We can loan it to the bank and invest in Certificates of Deposit. We can loan it to the U.S. Government and buy government bonds. Or we can loan it to corporations.

The other meaningful option is to buy land, stocks, real estate or own our own business. What are the returns of a couple of these options the last 30 years?

The S&P 500 returned about 11.09% since December 1984. U.S. Government T-Bills returned about 4%. (Source: FactSet) Inflation averaged about 3% during this timeframe. Adjusted for inflation, the obvious choice over the past 30 years was to invest in the S&P 500 or some version of this index.

I don’t suggest that any of us should invest all our savings in the stock market. A diversified portfolio of high quality stocks and bonds is still our recommendation. The allocation percentages of stocks, bonds and cash would depend on each individual’s circumstances.

The real goal is to vanquish the real risk to retirement, which is outliving one’s money. The reality is we are living longer in retirement and we will pay more for goods and services in the future. The famous humorist Will Rodgers made famous Mark Twain’s quote, “I am more concerned with the return of my money than the return on my money”. I would amend the quote to, “I am more concerned with the purchasing power of my money than the return of my money”.

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