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Welcome to My World
I grew up in a life insurance household in suburban Philadelphia, where my father and later my older brother were both in the business. My father taught insurance at Penn's Wharton School during the war and my brother went there for graduate school. I learned very early that life insurance policies are rated at "nearest birthday," in other words, at the half birthday. I was born on June 25th and I thought of myself as a Christmas baby since my half birthday is on December 25th. In my insurance-steeped world my age changes every December 25th.
Risk Management from Early On
Once as a boy I travelled to Washington DC and for the trip my father had me divide up my money: put some in my suitcase and some in my pocket. Later I learned that this is classic risk management. Then I developed my career in insurance.
Tune in to WIFM:
"What's in it for me"
The reason I'm brandishing my credentials in risk management is that I think it is time for us all to revisit our allocation. Are you over-weighted in stocks, which may be
at or near an all-time high
? Now is the time to answer that question, not later.
Longevity Risk
Speaking of risk, I'm becoming increasingly sensitized to longevity risk -- living too long. A baby born today is expected to live to 76 if they are male and 81 if female. But, if you retire today at 65, you can expect to live to 83 if you're a man, and 85 if you're a woman.
(Social Security Administration, Actuarial Life Table, August 2013). And
half the population can expect to live longer than that. A 65 year old couple today has a 25% chance of one of them living to 97.
(Merrill Lynch, "Annuities for Lifetime Income, 2016. Merrill Lynch Wealth Management. IMG Retirement Strategies calculations based on Society of Actuaries, 2012 Individual Mortality Tables, Basic.)
While these predictions of long life are good news in one sense, they presents challenges to the retirement portfolio. This dilemma was brought home to me recently, when I had the opportunity to work with a couple: 95-year-old male and 84-year-old female. I had worked with this couple six years prior, when the husband was 89. The male life expectancy in my software at the time defaulted to 92, so I planned on him living to 95. For this round of planning I just pushed their life expectancies both out to 100. What else could I do?
I Continue to Learn from My Clients
Another client, who is single, came in, eager to retire at 64, but wanting to be certain it was safe to do so. They conscientiously pointed out that when totaling their expenses they should plan for a new car every 10 years. In finance this is called a
sinking fund.
Here's a simple example for a homeowner.
Sinking Fund:
| Expense |
Cost
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Frequency
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Annual Cost
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| Roof |
10,000
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every 20 years
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500
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| Car |
20,000
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every 10 years
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2,000
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| Paint |
6,000
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every 10 years
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600
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| Total |
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$3,100
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The $3,100 should be added to the anticipated annual retirement expenses in this case. You might want to add other items: Home renovations? Travel? Education?
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