Longevity Risk

Welcome to Mr. Stillman's opus featuring John Stillman, their founder and president of Rosewood wealth management John awfully good to be back with you.

It's a little awkward when you're standing up and I'm sitting down normally were both seated for this the day you're standing up and I feel like I'm in a business meeting and I'm wearing a T-shirt and everybody else's in the suit intimidating me your so much taller than I am sorry decided to stand up for a change. Sure enough just to just to make it make us on a level playing field.

Here I see, but let's talk about longevity today on the show everybody since you have a lot of car. I do not know been around long time and I hope to be around a lot longer. Everybody seems to want to live for a very long time. So what we talk about longevity risk. Why is it risky to live a long time. Well it is kind of ironic right that companies are pouring tens of thousands if not hundreds of thousands of dollars into making you live longer and human longevity has been something that people live strive for. For a very long time so you have all these companies that that part of their whole thing is how can we make people live longer and be healthier and there is one company remember who it is, but they're dead set on life expectancy being 100 years old, while for humans, so that's something that exists in white yet.

Why do we talk about longevity risk well any time we pull listeners or people in classes or anybody who's approaching retirement about what is their number one fear. Time and time again the number one fear is what running out of money. Outliving your money right and so if you live a long time but that's what makes it risky. So, for instance, pretend like going on a road trip and we have a car that CNL kind of in need of repair, hasn't had the oil changed in a while.

Fan belts are loose might have some low air pressure in your tires and you're going to drive this car from here to California put a little risk and that trip right now. If we're just driving from here to Saks up the hall is not as big a risk.

Yes the car is not ideal, but for only driving to Saks Ball.

We can probably make okay what you can see the same thing if you're going into retirement in your 65 and you have maybe questionable plans in terms of how well your overall retirement plan is constructed, but you're only going to live until 70 well it's probably not that big a deal, you probably have enough money to last you five years, but if you live till 95 that's 30 years we have to fund and if you don't have a good plan set up. Well, that's where the risk comes in well you know we been doing these shows for a long time that I heard you say before that longevity is a risk multiplier.

Explain what you mean by that. Yes, so let's say you've done that basically risk multiplier means it exacerbates and really makes obvious any poor planning that you've done in other areas so let's say you didn't really account for inflation in your plan and you retire, needing $5000 a month to live on well by the time your in your late 80s you need $10,000 a month just to have the same buying power's, sorry if you didn't plan for that. That's a very obvious and your buying power's been cut in half 25 years down the road again. If you only live five years.

Yes, inflation would still exist but you probably wouldn't really notice it would just be creeping up in those five years to the point that it wouldn't really stand out to you.

If you have another good job of healthcare planning and let's say you end up in some kind of Alzheimer's care unit for a significant number of years.

Well that's costing a lot of money.

Again, if you were in the Alzheimer's unit for a year or two that would be one thing, but what if you're there for 10 or 15 years because a lot of times physically. Your health can be fine she's mentally you need the help and so that can last for really long time.

You can be one of those very expensive facilities for a significant number of years.

So again, the longer you live, the more it exacerbates all of the poor planning that you did or didn't do. I know you talk with a lot of people all the time you have new people coming in to sit down and talk with you about their own retirement and their hopes and dreams, and my question is how effectively has the average person out there addressed these financial challenges that can come with longevity. Well not very well for the average person.

I need the for the people who have addressed it. Well it's usually by accident right so maybe they have a really nice pension and that's going be a lifetime payment and their fine you know that, along with their Social Security and you know, even if they spent through everything else they still have so much money coming in each month that they're fine with that. That base income and I know a lot of people who are currently not Messerli clients but maybe parents of clients and they say their moms and their in her 90s and I always ask are you to be responsible for helping take care of her in any form or fashion financially or she okay although she's fine generally have any money but yes my dad's pension so she gets $3500 a month from that plus or Social Security so she's fine. So there are people who are well set up to address longevity risk, not necessarily because a great planning just because they happen to have the pension place there.

Okay. Well, one more question here today were talking about longevity risk on their this edition of Mr. Sillman's opus and John tells about somebody who came to visit you. Primarily they walked in the door and they told you John. I'm afraid running out of money and I'm scared to death that's going to happen to me.

What did you do to help this person well so I give you a recent example somebody came and they had a portfolio of around $1 million. They wanted on $9000 a month is a gross income in retirement.

So there was a very small pension. There may be about $500 a month and husband and wife both had Social Security so between those three income streams. We are going to be at about $4000 a month between his Social Security. Her Social Security and the small pension. So obviously we have a big gap to fill. We don't want to just pull $6000 a month off of that million dollar portfolio and hope that there is a pile still left when they reach the end of their life because then if they do round the money there down to only the 4000 month Social Security and pensions.

Whatever cost-of-living adjustment they get on out of the year. So what we end up doing was we took one piece and put it into an annuity that was going to pay them a lifetime income as long as either of them are alive.

It will pay out so we put nothing that was going to give us thousand dollars a month from retirement to the end of life. We put another trunk and a market-based income portfolio where we just focused on creating dividends and interest, but the rule is with that account were never going to sell anything whenever you sell shares anything risk to take the dividends in the interest off of that portfolio which could take the eggs whenever you kill a chicken. Okay, so as the market is up and down. Yes, we can have some fluctuations and what those payouts are, but we know that whenever selling anything, so we never gonna draw that down to nothing was going to take the dividends and interest, in perpetuity and then with the rest of it will. That was our growth bucket where you know we have a piece that's growing for five years and were in a draw that down and then that's going to let us move to the next piece which is invested little more aggressively draw that down until we moved to the next piece well if everything goes completely wrong. With all of those market-based buckets we know at the end of the day were still going to have two Social Security benefits a small pension thousand dollars a month from the annuity and whatever were getting off of the income portfolio. That's gotta be enough to pay for their basic lifestyle. Now, within 95% probability. They're not actually going to run out of money in those other buckets to but let's pretend like they did. Well, now we know that they have a base there, the more comfortable now instead of 4000 a month as their base is more like $6000 a month coming in as their base income regardless of what happens with everything else and so you can have to decide I will what's my number that I'm comfortable with that. I must have coming in and for them and they said all right $6000 a month you indexed for inflation.

We feel pretty good about that is our base. No matter how long we live, we can at least pay the bills on seems like there might be a lot of different moving parts there will there are and it can sound confusing when were just talking about it verbally, but usually when people see it visually see all mapped out the makes a lot of sense and so yes there is some sophistication to it, but it's not so complicated that you can't understand it in a 30 minute discussion so you know I think it's important understand it is not that hard to get some of these things in place for yourself. All right.

Well, there's some thoughts on the longevity risk.

As always, John Stillman has lots of thoughts in his head, but what your retirement can be like how you can get to where you want to go and if you like to get in touch with John at Rosewood wealth management.

You can arrange a time to come in and sit down and have a conversation kind of a getting to know you session it is 800-545-2991 that is 800-545-2991 call or text Armand Stutz along with John Stillman, your financial retirement planning strategist and financial coach for the Triangle. This is Mr. Sillman's opus Carolina once towards doing business as Rosewood wealth manager is a registered investment advisor in the state of North Carolina. The material presented is intended to be general information and should not be construed by any consumer is the rendering of personalized investment advice