“To sustain longevity, you have to evolve.” – Aries Spears
Science, coupled with widespread better behaviors, infrastructure, and practices, has dramatically extended human life expectancy in modern times. Generally speaking, global life expectancy has more than doubled since 1900 and jumped to over 70 years of age, from only about 30 years old in the poor, pre-modern world. In more developed, wealthier countries, life expectancy is even higher, with the average person living over 83 years in several countries, and Japan leading at close to 85 years (US is about 79 years, for comparison).
From a planning perspective, this brings two things to mind:
- Being able to take advantage of those “extra” years by still being in relatively good health and doing the things we love, and
- Figuring out how to pay for it. More years equal more expenses. And more years in poor health (requiring aides or skilled nursing care) equals EVEN MORE expenses.
While our default approach is to measure biological age in years since we were born, when we look more closely at the aging process, there is evidence to support the idea that telomere length shortens as we age. [According to genome.gov, “a telomere is the end of a chromosome. Telomeres are made of repetitive sequences of non-coding DNA that protect the chromosome from damage. Each time a cell divides, the telomeres become shorter. Eventually, the telomeres become so short that the cell can no longer divide.”] Thus, from my non-medical-professional perspective, it does make sense that taking steps such as maintaining a healthy body weight, exercising, managing stress, and eating well could slow the aging process, and that this corresponds to slowing the rate of telomere shortening.
I’m sure the above good health suggestions are not a surprise to anyone (if they are, please seek professional help), but it’s interesting to me that more and more underlying mechanisms are being uncovered that are starting to help quantify the aging we witness on the outside of our bodies. Change in telomere length is not the only one of these underlying progressions, and much more research needs to be done on the subject. Also, even if we could lengthen our telomeres, it could actually be detrimental (mo’ telomeres mo’ problems), so beware of measuring or lengthening gimmicks.
So, Why the Biology Lesson?
From a broad financial planning perspective, aging is at the core of what we do. It’s easy to plan for a one-year retirement, at least financially speaking. It’s a far more arduous undertaking to prepare for 30, 40, or even 50 years of retirement, when it means a portfolio has to sustain a person’s lifestyle PLUS keep up with inflation over that timeframe. Simultaneously, how we age also directly affects the cost of retirement, as slow deterioration that requires years of high-touch healthcare can be prohibitively expensive vs. a situation where a person is functioning at a high level both mentally and physically until their final days.
What I consider to be an ideal retirement situation is where we can a) avoid depleting the corpus of one’s retirement nest egg by relying on systematic income for lifestyle needs, and b) also creating some additional growth to keep pace with inflation over time. And, just as we can monitor our weight, exercise regimen, stress levels, and diet to help increase our quality of life, there are parallel factors for allowing a portfolio to age gracefully:
- Nest Egg & Structure (Weight): We are financial planners, not magicians. The level of assets in a portfolio at retirement, as well as tax implications for those assets in the future, is absolutely critical for being able to build a sustainable retirement income plan. The less a person has in other retirement income sources (e.g., social security, pensions), the more important this is. Similar to poor health habits, poor saving habits (and resulting lack of savings and/or tax diversification) cannot suddenly be corrected the day we retire. Building an adequate nest egg typically takes decades of disciplined saving, or many years of building a business that can be sold at retirement. Like the health of our body and mind, one’s portfolio health is an aggregate of years of inputs, outputs, and underlying components (e.g., taxation and diversification).
- Rebalancing & Monitoring (Exercise): Even if your weight is at a good level, underlying markers can vary wildly, such as heart health and blood pressure. We can help keep these things in check via exercise, but unfortunately, it’s something that has to be done on an ongoing basis. Similarly, we need to keep our retirement portfolio health in check through rebalancing back to our long-term investment framework – inherently trimming the areas that have performed well and nurturing the areas that have not. Unlike exercise, this can actually be done on your behalf by an advisor or computer algorithm, and it helps to both embrace and dampen the effects of volatility and “irrational exuberance” that occur every so often in markets.
- Committed Expenses & Volatility (Stress): Even with a healthy weight and solid exercise regimen, living a life riddled with bad stress (yes, there is also good stress) and anxiety can still undermine your quality of life. Through managing expectations, planning, and meditation, a lot of stress can be avoided, reframed, or mitigated. An example of bad stress on a portfolio is when income is needed, but raising the cash requires forced selling, potentially at a loss, which usually occurs during times of market volatility. It may mean the holdings cannot adequately participate in the eventual recovery, resulting in permanent impairment of one’s nest egg. Repetition of this process not only causes retirement failure (running out of money before death) but can add physical/mental stress to go with it. Fortunately, by planning for adequate cash reserves, modest committed expenses (the bills you MUST pay), ability to rebalance into volatility, and reliable growth of income, you can sleep better at night with the confidence that you won’t outlive your money.
- Composition & Discretionary Spending (Diet): You are what you eat. It’s not surprising that the food we eat directly affects body composition and gut microbiome, but there are also less obvious strong links to brain interaction. Nutrition provides the most basic building blocks of the massive system of interactions that we identify in aggregate as a human. Similarly, our portfolio’s composition and what goes into/out of it are of utmost importance. Two portfolios can look very similar on the surface in the amount of equities, fixed income, and alternatives each holds. Still, the differences between the two can be infinite because of the available choices of building blocks for each asset class and the resulting consequences of these choices. Also, the level of discretionary spending (demand we can control, like vacations or gifts) can make or break a portfolio’s success over time. So, just as it may make sense to lighten up on the calories gaining some holiday weight, reducing spending when a portfolio is in a period of drawdown can help your assets recover to the target “weight” of your nest egg. That is to say that retirement spending and retirement portfolios are not static constructs but instead should be monitored, cared for, and adjusted on an ongoing basis.
Insult to Injury
Since the onset of COVID-19 and the accompanying even-lower-rate environment in which we now live, generating a “livable wage” from an investment portfolio has become more challenging. On the traditional, publicly-traded side of markets, core fixed income currently yields about 1-3% (looking across some US Treasury, aggregate bond, and total return funds). Accounting for taxes and advisory costs more really makes this a 0-2% net yield. Reaching into lower quality (high yield) ETFs/mutual funds can still provide gross income in the 4-5% range, so perhaps between 3-4% net.
With that in mind, a natural question may be: “but isn’t generating three-to-four percent net yield pretty good nowadays?” Yes…BUT…digging a bit deeper into the history of a very common high-yield ETF will reveal that – although it has paid what seems to be a relatively attractive income on the surface – the total return over time has been less than the yield. So, yes, investors are receiving income, but they’re also depleting principal to do so.
Shrinking Income + Shrinking Nest Egg = Losing Proposition
Making matters worse, the simple analysis I ran above was during a period of falling interest rates (the US 10-yr Treasury has fallen from about 3% to less than 1% since the start of 2014), which should have helped fixed income prices appreciate over those six years. It’s essentially a best-case scenario vs. anything we should expect for the foreseeable future, and the verdict is that this investment aged poorly. A retiree spending the income would now have a smaller nest egg (as the ETF price is lower) and less current income than they did six years ago (the current yield is less than it was, plus it’s being calculated on a smaller amount of principal).
I should also point out that this period included multiple drawdowns of about 20% or more (the most recent being March of 2020). It should go without saying, but depletion of principal, declining income, and high volatility are essentially the opposite of the attributes of a portfolio that ages well. Now that we’ve identified the longevity problem we face, we’ll begin focusing on solutions next time.
Until next time, this is the end of alt.Blend.
Thanks for reading,
Steve
