Longevity Risk

With health and well-being at the forefront of everyone’s mind, I believe it is a good time to have a discussion about longevity and the risks it presents to retirees and those close to retirement. This topic has also been discussed in a previous blog about risks retirees face linked HERE.

With medical technology improving at an astounding rate, people who retire at 65 could be looking at 35 years in retirement.  With this longer expected lifetime, the question for clients becomes, “Can our money last that long”.  This leads to the new idea in the retirement planning world of Longevity Risk Aversion, or the fear someone has about outliving their assets.  Rather than using the average life expectancy, which 50% of the population will outlive, we use a life expectancy of 97 of which only about 10% of people will live beyond. Going forward we might have to increase our life expectancy assumptions so that we can make sure our clients will have enough money to last through their retirement given that longevity will increase over time.  

Longevity is dependent on an individuals’ habits, health, family health history, and other socioeconomic characteristics that correlate with mortality – it is up to each person, in consultation with their financial professional, to include these assumptions in their retirement plan.  For example, if a client has poor health and has family health issues, they might want to front load their distributions to enjoy the rewards of their years of work while they can.  While someone who is healthy and had parents who lived well past the averages might want to back load distributions to make sure they do not run out of money while still alive.  Below are example charts of life expectancy.  If you would like to see your personal longevity illustration, please visit LongevityIllustrator.org

American Academy of Actuaries and Society of Actuaries, Actuaries Longevity Illustrator, http://www.longevityillustrator.org/, (accessed Dec., 4, 2021).

Retirement Withdrawals

The old rule of thumb for safe withdrawal rates from retirement accounts of 4% may not apply in coming decades.  With today’s low bond yields and above-average equity valuations a withdrawal rate closer to 3% may be more appropriate.  Additionally, determining your tolerance for variations in your retirement cash flows should be considered.

When thinking about withdrawals it can be helpful to view it on a spectrum. On one end is a static withdrawal system. Such a system assumes a retiree withdraws a percentage (3 or 4%) in year one of retirement then inflation-adjusts the dollar amount in each subsequent year. For example, if a portfolio is valued at $1 million a retiree would withdraw $40,000 in year one. If inflation was then 2%, the withdrawal in year two would be $40,800 ($40,000 * 1.02). This method delivers a stable inflation-adjusted cash flow.

On the other end would be a fixed percentage system. In this system a retiree would set an initial withdrawal rate and keep the percentage steady. Assuming a 4% withdrawal rate, a $1 million portfolio would yield a distribution of $40,000. If there was a decline in the portfolio value due to a market downturn of 20% in year 2, the withdrawal would need to be reduced to $32,000.  Conversely, if the portfolio had grown 20% the withdrawal would be $48,000. 

There are positives and negatives with each of these systems. The static withdrawal approach has the advantage of simulating a paycheck. At the same time, the static method runs the risk of prematurely depleting a portfolio if there happens to be a weak market near the beginning of retirement. This is called sequence of return risk.  The fixed percentage system addresses the sustainability issue, but cash flows are much more variable year to year. This means in a “lean” year with bad market conditions a retiree might not be able to withdraw enough to fully cover their expenses. 

The good news is that there are a couple of options that sit in the middle ground. One is a method called Required Minimum Distributions (RMD) which means each year a retiree takes a slightly larger percentage of their portfolio (due to reduced life expectancy), based on the previous year’s ending balance. RMD’s begin at age 72.  Another method uses fixed annual percentage withdrawals as a starting point and applies a “floor” and “ceiling”. This means in a bad year a retiree would slightly reduce withdrawals from the base percentage and in good years they would slightly increase withdrawals (dynamic spending strategy).  Small adjustments to retirement spending, guided by actual market conditions, can go a long way toward boosting the probability of long-term retirement success.

Each retiree should consider their tolerance for the risk of depleting their assets prematurely and the variability of cash flows as they design a plan that is customized for their lives.  Issues that should be considered are the size of their retirement assets, other sources of income such as Social Security or pensions, and willingness to adjust your lifestyle each year.

Investor Quotes

Being a successful investor means keeping your emotions in check and thinking long-term. Here are quotes from some of the greatest investment minds of all time.


“The investor’s chief problem – and his worst enemy – is likely to be himself. In the end, how your investments behave is much less important than how you behave.”

Benjamin Graham, Author, professor and mentor of Warren Buffett

“Your success in investing will depend in part on your character and guts, and, in part, on your ability to realize, at the height of ebullience and the depth of despair alike, that this too, shall pass.”

Jack Bogle, Founder Vanguard

“The function of economic forecasting is to make astrology look respectable.”

John Kenneth Galbraith, Harvard professor of economics

“The idea that a bell rings to signal when to get into or out of the stock market is simply not credible. After nearly fifty years in this business, I don’t know anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has.”

Jack Bogle, Founder Vanguard family of funds

“Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”

Peter Lynch, Former manager of the Fidelity Magellan fund

“The stock market is a device to transfer money from the impatient to the patient.”

Warren Buffett, Investor

“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”

“The intelligent investor is a realist who sells to optimists and buys from pessimists.”

Benjamin Graham, Author, professor and mentor of Warren Buffett

“You make most of your money in a bear market, you just don’t realize it at the time.”

Shelby Cullom Davis, Investor


Following the advice of great investors will lead to success as an investor if you can manage your behavior and stay focused on your long-term goals.

Does your financial advisor work in your best interests?

The Security and Exchange Commission (SEC) rule called Regulation Best Interest, which is meant to reduce conflicts of interest among brokers who sell investments like mutual funds and annuities, may have made the situation worse (see CNBC article).   According to that article the Financial Industry Regulatory Authority (FINRA), noted that there are a total of 625,000 brokers and 360,000 financial advisors for a total of 985,000.  With 300,000 of the 360,000 financial advisors “dually registered” that leaves only 60,000 or 6% of brokers/advisors that must act as a fiduciary and do what is in their client’s best interests ALL of the time.

When looking for a financial advisor you can trust, a Google search of “how to select a financial advisor or planner” will lead to some pretty simple guidelines. The top three qualifications include selecting an advisor that is Fee-Only, a Fiduciary, and a Certified Financial Planner (CFP).  A Fee-Only advisor is compensated exclusively by their clients meaning that potential conflicts of interest related to commissions for product sales are completely eliminated.  Fiduciaries are like CPAs and lawyers, and are required by law to do what is in their client’s best interests.  Financial advisors that are CFPs are held to a higher standard than brokers and advisors without the CFP designation. To earn and maintain their CFP designation an advisor must adhere to the following rules noted here

Von Holt Financial Advisors has been a Fee-Only advisory firm and acted as a full fiduciary since its founding in 1992.  Albert Von Holt has been a Certified Financial Planner (CFP) since 1994.  Brock Von Holt is currently studying for his CFP designation which he is expected to complete in 2021.

What is your Social Security worth and why does it matter?

When it comes to asset allocation most people only think about their portfolio in terms of stocks, bonds and cash-type investments. This is a mainstream way of thinking that leaves out one of the largest assets most people have - an annuity called Social Security. While you might think about Social Security as an income stream, it is possible to convert that income stream into a current value based on your payment amounts and life expectancy. In financial terms you are determining the Net Present Value (NPV) of your payments in today’s dollars. Thinking about Social Security in these terms can help reshape your view with regards to the amount of risk in your portfolio.  It will also lead to a portfolio that shows a much lower exposure to stocks.

For example, let’s say a couple has a $1 million portfolio that is made up of 50% stocks ($500,000) and 50% bonds/cash ($500,000). Now let’s take their Social Security payments into account. Conservatively, let’s assume their respective Social Security payments are $2,500 a month for the spouse that worked outside of the home and $1,250 for their spouse (spouses receive the greater of their own Social Security or half of their spouse’s). If we also assume they will receive these amounts for a period of 15 years (life expectancy once payments start), the Net Present Value of those payments would be $899,500 giving us a total portfolio of $1,899,500. Since these payments are assumed to be guaranteed, as they are backed by the U.S. government, we would categorize them as cash/bonds. That means that the overall allocation would be 26% stock ($500,000) and 74% cash/bonds ($1,399,500), which is a much different picture than if these payments are not considered.

You can use the following calculator to determine the Net Present Value of your Social Security payments. To give you some idea of the life expectancy to use for your calculation see the chart below which shows the probability of living to various ages.

Broadening the way you look at your portfolio will help you better understand the real structure of your retirement investments.  Including the NPV of your Social Security when assessing your overall portfolio allocation will give you a clearer picture of your real risk profile.  

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