March 7th, 2019 | by Gregg S. Fisher, CFA, "Invest with Reason"
The High Cost of Longevity
- Longevity risk is a key challenge that retirees face.
- Rapidly rising health-care costs are one element of the challenge; cancer patients are confronted with a potentially devastating financial burden.
- Nobel Laureate Robert Merton worries about a retirement-funding crisis and dispenses some advice for savers and investors.
For a financial advisor, perhaps no challenge is more important than a client’s longevity risk—the prospect of a retiree outliving his or her savings. I was reminded of this fact by two recent events in which I was privileged to be involved. Gerstein Fisher hosted a seminar with two leading cancer researchers that was moderated by Samuel Waxman, founder and CEO of the New York City-based Samuel Waxman Cancer Research Foundation. I also interviewed Nobel Laureate Robert C. Merton, who thinks a retirement-funding crisis is brewing in this country, for my podcast series, “The Q Factor,” in which I discuss the importance of data and quantitative analysts with experts from various walks of life.
The punitive cost of cancer treatment is one particularly pernicious element of a large financial challenge for retirees (and for working folks): the rapidly escalating costs of health care. One health-cost expert (HealthView Services) estimates that a healthy 65-year couple will need to cough up nearly $500,000 just for Medicare and dental premiums during their golden years.
Those unfortunate enough to be stricken by cancer frequently face a financial crisis. According to one recent study published in The American Journal of Medicine, nearly half of cancer patients burned through their entire life savings after just two years of treatment costs. To add insult to injury, for patients with good health prognoses, costs escalate due to extend periods of treatment. Keep in mind that age is a key factor in the incidence of cancer (among other diseases) in our rapidly aging society: the median age of Americans diagnosed with cancer is 65, according to the National Cancer Institute, so a disproportionate percentage of patients are bearing the financial burden later in life when they are living on fixed income in retirement.
Merton, awarded the Nobel Prize in Economics in 2007, frets about an “incredible underfunding” of retirement savings in America—from “vastly underfunded” public pension systems, to unrealistic portfolio-return assumptions for corporate defined-benefit plans, to underfunded and poorly managed individual defined-contribution plans such as IRAs. Merton uses a simple definition for a “good retirement”—one in which one can retire and maintain one’s standard of living from the years just prior to retirement. By this yardstick, he fears that many Americans will fall short and face the frightening prospect of outliving their money or, at a minimum, dramatic cuts in their standard of living. In my podcast, he provides some tangible advice, ranging from simple solutions such as boosting savings or working longer, to investment strategies like analyzing and perhaps simulating annuities or considering a reverse mortgage on a residence if that is a retiree’s only source of equity.
As a portfolio manager, these two events really drove home for me as it relates to thinking about investment strategies for clients: constructing and managing portfolios for them that are both strong enough to generate enough long-term growth to outrun inflation such as galloping health-care costs, and factor in risks such as living to age 100 or getting smacked by the financial burden of cancer treatments. Hats off to all of the financial advisors out there who also need to grapple with these very difficult challenges.