Name: Future Financial Security: Planning for a Long Retirement
Uploaded: 2023-11-14T20:24:00Z
Duration: 13 min 27 s
Description: Many investors nearing, or in retirement, fear outliving their savings, especially as lifespans lengthen. Glen Franklin, Jackson National Life Distributors discusses strategies for securing a stable retirement and investing for a long life.

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Many investors nearing, or in retirement, fear outliving their savings, especially as lifespans lengthen. Glen Franklin, Jackson National Life Distributors discusses strategies for securing a stable retirement and investing for a long life.

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Future Financial Security: Planning for a Long Retirement

Our conversation is an important one. We're talking about longevity risk, that fear about living one's retirement savings. Glen, it's great to have you here, as longevity risk is a top concern for many investors. Welcome.

Thank you, Raakhee. It's great to be here.

We've got a lot of information to get to, so I wanna dive right in. I wanna start with the recent study released by Jackson Financial that focused on investor and advisor perspectives on longevity risk. Tell me a little bit about the key findings in the study, and tell me a little bit about what surprised you the most, Glen.

Sure. Some of the top line findings that we thought were really sort of interesting included, first, how people are estimating their life expectancy, and by and large, they're not doing it accurately. And second, how does that compare with what advisors are saying they do to estimate longevity? So, let's talk about how people are estimating life expectancy. For the most part, what we saw overall was that people were estimating life expectancy by looking at their parents' age of death as a surrogate. In addition, many people would look at a medical opinion, so their medical professional or media coverage on life expectancy. And then we also saw that some people, the youngest cohort in the study, so people in their late 50s, were looking at other living relatives, and in particular, they were looking at their oldest living relative. And as a result, many were overestimating their life expectancy. Some were underestimating. And then meanwhile, advisors, one thing that we were seeing was a disconnect between how they were each approaching estimating life expectancy. Now, with regard to what's surprising in the study, one of the things that we find that's really interesting in research is often that there's a story beneath the story. So what do I mean by that? Often we're going to look at subpopulations or segments of the respondent pool. Now, in this case, we had over 1,000 people in our study, so we had plenty of opportunity to drill down on that. One of the groups that we looked at was people that own both an annuity and have a pension versus those that did not, and one of the interesting things that we found that was a little bit surprising is they were really keyed in on preserving an inheritance or being able to make a bequest. Why is that surprising? Well, these are people that are seeking out guaranteed sources of income, and yet you need a pile of assets basically to pass it along to your heirs. So what we take from that is, although they're seeking out guaranteed sources of spending, they're actually not worried about the spending so much as they're using that guarantee to protect their savings. So in fact, they have a savings mentality that they're using with their spending instruments, and that is what's enabling them to leave money in a bequest.

So Glen, we know or we understand how folks are getting it wrong. So how should people estimate their mortality and create a strategy to address longevity risk without letting sort of the emotional pieces get in the way of that planning process?

Yeah, so first thing is, let's talk about neuroscience. What we know is that how people make decisions is a complex modulation between emotions and facts. We all like to think that we're fact-based and that we consider key inputs and then make a rational decision, but the reality is we don't, and so one of the things that would be helpful to us is to get an objective observer, you know, a financial advisor into the mix. While they care about us, they are not as invested in the emotionality of our life expectancy as we are, so they can provide a reasons outside counsel and help us work through that decision process. So that's one. The second thing is, we're getting it wrong most of the time, you know, as I was saying. About two-thirds of the population in our study overestimate their life expectancy. A little less than one-third is underestimating it, so really only about 10% are getting it right. Advisors, on the other hand, are using long-term averages and population means, and they're being more conservative overall, so they're expecting a longer life than we are. And from a planning standpoint, that's actually a good thing because that means that we're being more proactive around addressing the risk.

So Glen, what would you say some of the key strategies are to mitigate longevity risk?

Yeah, so there's really three things that you wanna do, and they all come under the heading of diversification. The first is, you want to have a diversity of guaranteed income streams. Most people have social security, so that's generally a given in the plan. But in addition, having a pension if you've got one available. Acquiring an annuity if you need one. And the reason you want those income streams is not just about desired versus mandatory expenses or necessary versus discretionary. People really don't think about their household budgets that way. What they think about is lifestyle and retirement. And by the way, it's not that they conceptualize retirement generally as a continuation of their pre-retirement lifestyle. What we found in fact is about 80% of people think of retirement as a great new chapter in their lives that everybody should look forward to. So those guaranteed income streams are about maintaining that desired lifestyle that people envision in retirement. Second thing is looking at tax diversification. So, for that, having accounts that are taxable, having accounts that are tax deferred, and those that are tax exempt. Specifically, you have your after-tax brokerage account that many of us have. You have a 401k or an IRA, and those are deferred until you draw income from them. And then you might have Roth versions of those that are tax exempt, or the HSA. If you're fortunate enough to be able to invest in a high deductible health plan, put money into the HSA, you've got the triple tax benefit of the money going in before taxes, it grows tax-free, and if you use it for healthcare expenses in retirement, it comes out tax-free. And then the last thing is diversity on scenarios. A robust plan should take into account all conceivable possibilities, not just the likely outcome of your retirement, but for example, what if things blow up in the market, or what if the roof collapses on your house? Thinking about those types of risks and then doing something in the plan to address them so that you have the peace of mind that you've covered all your risks. I think those are really the key points.

Glen, you talked a little bit about the importance of having sort of this unbiased perspective and point of view when you're thinking about longevity risk. So it's clear that it's an important topic, right, for financial professionals and their clients. Tell me a little bit about if you think those folks are on the same page when it comes to creating a strategy, and did the study shed any light on this?

Yeah, in fact, one of the things we found is that when we were talking with investors, they were very much prone to recency bias. As we know, in the past couple of years, inflation has been significantly, excuse me, elevated, and investment returns have been somewhat less than historical averages. Meanwhile, in talking with advisors, when we asked them about inflation expectations or key planning inputs, you know, what number they would use, or investment returns, they tend to look to long-term averages. And so what you're getting is a sense of a broader perspective. Investors are looking at, "Well, whatever happened in the past couple of years "is likely to happen going forward." It's not really the case, and advisors are potentially in a position to counsel the investor on what the overall long-term average is and what might be a better input for their plan.

Glen, when folks are addressing their longevity risk, right, how do you incorporate inflation, social security, a pension if you have one, and tax implications into your financial planning approach?

One of the key things with that is really to look at what is the plan designed to do? Number one, we're addressing longevity risk. That is the key thing. Is your money going to last as long as you are? And so you wanna look at income streams and your body of assets. If you're going to draw asset, draw down from your assets, and some of us are fortunate enough to be in a position to do that, that certainly is part of the picture. But when you're drawing those assets, you also wanna look at, are they coming from accounts with different tax treatments? For example, in the case that your house needs maintenance, if you've got the option to take the money from an after-tax account or from a tax exempt account, you're potentially not increasing your income for the year and putting yourself at risk of having the taxes on your social security benefits being arbitrarily increased. So tax diversity is important from that perspective. Second thing is looking at social security as an inflation protected annuity, and one that goes up in value every year you delay claiming. So many people claim at the earliest possible age, and when I say so many, there's a large portion of the population that gets to 62 and thinks, "I'm getting my money back." Yes and no. You're getting actually a discounted fraction of your potential earnings back. And even at full retirement age, you're not getting as much as you could. If you're able to delay until age 70, you're maximizing that benefit, not only for yourself, but you're also looking after your family because the survivor's benefit is going to be based on that as well, and that's inflation protected money that's difficult to replicate in the private market. So those things are really kind of essential to having a robust plan that deals effectively with longevity risk.

Glen, can you share some real-life anecdotes that illustrate how individuals sort of align their long-term financial goals with the objective of avoiding the risk of running outta money?

Yeah, so we've talked with people a lot about this topic and where their answers span the gamut. Some people are creating detailed models based on actuarial tables or the best known life expectancy calculators. Other people are completely winging it. They just aren't doing any sort of detailed planning, and everything in between. So one of the things that's really important is engaging the advisor on creating a written plan. Any plan that's written down is one that's much more likely to be followed. And some of the interesting things we found, for example, in the study is that groups of investors, some are more prone than others to actually engage with a written plan. For example, people who own an annuity and a pension, much more prone to have a written financial plan. When the household financial decisions are made by a female versus a male or an equal partnership, much more likely to have a written financial plan. So, number one, having that written plan so that you know what the expectations are, you have your inputs documented and an understanding of how you're addressing risks, then you can live your life. Longevity risk first and foremost is about understanding what you need to do to have a satisfactory retirement. It's not about continuing to live in the plan. It's about living in your life, and so that gives you a sound emotional basis in which to do that. And then last, it's making sure that the advisor is giving you objective advice. And they're really the person that's most well-equipped to do that because they have a deep understanding of your finances and your personal situation, but they don't have the level of emotional investment in the outcomes that you do. Obviously, the number one thing we all fear is death. That creates a lot of emotionality around a retirement plan, and so in that case, it's good to have that third party or that neutral person guiding you in the plan.

Glen, you touched on this very quickly. I'd like to ask you, how does gender play into longevity risk, and does gender matter in the planning process?

Yes, gender is one of the most important issues, and yet we come at it in a way that's not completely effective. What do I mean by that? If you ask advisors what.

Future Financial Security: Planning for a Long Retirement

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