Prepping for the 40- to 50-Year Retirement

Editor’s note: In his new white paper “Is Our Industry Prepared for Retirees’ Longer Lifespans?” Salvatore Capizzi, chief sales and marketing officer of Dunham & Associates Investment Counsel, an RIA and broker-dealer, discusses the need for financial advisors to prepare clients for much longer lives. He calculates that food alone could cost a couple $2.7 million over a 50-year retirement.

Jerilyn Klein: Sal, in your white paper, you mention material you’ve read that has gotten you thinking about the plausibility of a 120- to 130-year life — which you say could mean 40 or 50 years in retirement. Can you give our readers a quick overview?

Salvatore Capizzi: Steven Austad, a biogerontologist known for his research on aging, and Jay Olshansky, a scientist and professor of public health, have on ongoing bet about whether someone born before 2001 will live to be 150. Austad, who bet it’s possible, speaks of the rapid progress in understanding the biology of aging and potential interventions to slow or even reverse it.

I also read the book “Lifespan: Why We Age and Why We Don’t Have To,” by Dr. David Sinclair, a Harvard Medical School professor, who believes we’re going to live to be 110 to 120 years old. A drug to expand longevity in dogs, not mentioned in the white paper, is going through FDA approval. [Scientists at Harvard Medical School and the Buck Institute for Research on Aging have reversed aging in mice through genetic and cellular manipulation, Capizzi notes in his white paper.]

Dario Amodei, CEO of Anthropic, a company focused on responsible AI, argues that new “powerful AI” will help change doctors’ way of thinking and could eliminate a lot of diseases within seven to 12 years of its development. And he’s projecting, based on that, that the average lifespan will reach 150 years. In addition, a 2024 report by Morgan Stanley, “The New Technologies for Longer, Healthier Lives,” identifies 10 technology companies working on treatments that could wind up expanding human life.

Klein: Is there still a case for planning for longer lives given the possibility that these lifespan projections are well overestimated?

Capizzi: Just to be balanced, Olshansky, who was part of the bet, says there’s really no evidence, based on the work he does, that we’re going to be living that much longer. Still, as an industry, we have to start providing for the possibility that we’re going to be living [at least somewhat] longer. I strongly believe this. Friends that have prostate cancer that would have killed them maybe 15 years ago, 10 years ago, they’re doing great; I know three people over 100 years old. I didn’t know anyone 20 years ago, or even 15 years ago, who reached 100.

Klein: Does living significantly longer inevitably mean a long, downhill slide? You wrote that as you personally contemplated 40 to 50 years in retirement, your initial thought was, “Why would I ever want to do that?”

Capizzi: My initial perception when I read Sinclair’s book was, I’m going to be in a wheelchair or need a walker, and not enjoying my life; I’m going to be a burden to my kids. But here’s the key [from Sinclair and others]: It’s not the expansion of lifespan, it’s the extension of health span — we’re going to be healthier as we get older and older, and living an active life. Advancements of science are not only going to cure certain diseases, but even reverse some effects of those diseases.

Klein: So, let’s assume we will live longer, and healthier. Do advisors need to think about this for their clients who are already in the second half of life — age 50-plus — or just their younger clients?

Capizzi: In their 80s, probably not; 70s, maybe not. Certainly, for clients in their 50s, 60s it is something to start thinking about. But here’s where the paradox lies: When I started in the business, we did age-based planning: A client who was 20 years old was advised to have 20% in fixed income, 80% in equities. By the time they hit 65, they’d have 65% in fixed income, 35% in equities. Because the expectation back then was that a client who was 65 would pass away somewhere in his late 70s, early 80s.

All we were guarding against was sequence risk: We didn’t want that client to retire and the market to then have a major decline, which would basically deplete their assets or at least cause some serious damage to the retirement portfolio. We just laddered bonds because we didn’t have to worry about them living 20, 30, 40, 50, or 60 years in retirement.

But now the investment paradox comes into play: If you are too conservative early on in your retirement, you can still deplete the assets — no different than if you were too aggressive early on. If I want to outpace inflation and I’m living longer. I need growth. But if my portfolio is growth-oriented, that could really hurt me from a sequence-of-risk standpoint.

Klein: Can you illustrate this with some numbers?

Capizzi: Here’s the little story in my white paper: A tortoise and a hare each have $1 million portfolios and average a 5% [annual] rate of return. Each withdraw $40,000 annually, adjusted for 2% inflation.

The tortoise, far more conservative up front, depletes his funds within 27 years. Wanting to limit risks, he received annual returns of 2% for the first 12 years of his retirement, 4% for the next 12 years, 6% for 12 years, and 8% for the final 12 years. But the hare, more aggressive early on, ends up with $1.9 million after 48 years in retirement. Always wanting to start fast, she received annual returns of 8% for the first 12 years of her retirement, 6% for the next 12 years, 4% for 12 years, and 2% for the final 12 years.

Klein: Could annuities help the tortoise, or advisory clients who live decades in retirement?

Capizzi: We sell annuities and I’m not an annuity basher. I think they have a wonderful place in a portfolio. But if we over-allocate into annuities where we are just trying to create an environment where sequence of risk is not a factor, my concern is that it becomes too conservative a portfolio. You can actually hurt the client by being way too conservative with annuities.

Klein: Many advisors use a retirement time horizon to age 95 to plan for their clients. Is this still generally sufficient, and what factors should advisors consider for individual clients?

Capizzi: If we’re creating an environment right now where we can reverse some medical conditions and cure these types of medical events, family history becomes a less important determinant in how long clients are going to live. So, the conversation needs to talk about the fact that even if your parents didn’t make it past 80 years old, even if heart conditions were prevalent within the family, the question becomes, “How do we become a little bit more growth oriented within portfolios so that we can accommodate a longer health span?” Maybe living to be 110 years old.

Our planning has to be a little bit different than the typical bucket series. The investments we use, the strategies we use, have to be more in tune with a longer lifetime.

Klein: What type of strategies do you use?

Capizzi: We use overlay strategies that minimize the amount of equities at the top of the market and increase the amount of equities at the bottom of the market. It’s done by math, AI, dot factors, no emotional thinking, no committee meetings. More of what we call “buy fear and sell greed.” It’s inspired by Warren Buffett’s “be fearful when others are greedy.”

When we hit the new [stock market] high in early February, a 60/40 [equities/fixed income] investor would have had 27% of their portfolio in equities. Then as the market declined, we went shopping. We’re shifting where the volatility is experienced by the retiree: Rather than having the volatility at the top of the market, we want the volatility at the bottom of the market. It allows you to control sequence risk to a degree, but also to still get market returns right.

In a 60/40 portfolio, you could be at the top of the market as little as 20% in equities, and at the bottom of the market, if we’re in a bear market, that 60/40 portfolio could be at 100% in equities. Overall, your risk is still going to be a 60/40 return over the long-term, even if only 20% to 27% of the portfolio is in equities at any particular point in time.

Klein: Let’s talk a bit about inflation. In your paper, you mention that you calculated that you and your wife would need $2.7 million in retirement savings to cover food alone. What should advisors consider regarding inflation over a decades’ long retirement?

Capizzi: The Fed is trying to hit a 2% inflation rate; they’re not trying to eliminate inflation. If I retire at age 65 and my life expectancy is another 20, 25 years, 2% inflation compounded will have an effect, but it’s not a detrimental effect. But what happens, Jerilyn, if I’m living to be 120 years old, 130 years old? For fun, I looked at how much the USDA says we’re eating each day, how much we’re spending on food, and food inflation [according to the historical Food Consumer Price Index data.]. Basically, if you are live 50 years beyond your retirement, you and your spouse, if you’re average, will be eating $2.7 million of your assets.

Klein: You also wrote that “without immediate and dramatic reformation of financial planning networks, extended human longevity could transform into an economic disaster.” What types of government-led reforms might help or be necessary if living to 100 and over becomes more common?

Capizzi: I can’t pretend that I know everything about Social Security, but extending the retirement age is probably an inevitability, and probably the most logical thing that we can do if we as a society are going to be living longer. Think about how many people you know who are 65 years or older and are still working [Capizzi is in his late 60s]. Is that the same number you remember 10 years ago? People are healthier, and when we’re increasing health span, more are thinking, “I can work longer, I am alert, I am productive, I make contributions.” But does raising the retirement age really alleviate where we are right now with Social Security? My fear is that it doesn’t and that the system would be destined at one point to see its demise. We’d have to look at more ways to place more funds in the program.

Klein: How would intergenerational wealth transfer and estate planning need to change if living longer becomes the norm?

Capizzi: A friend of mine is going through this right now. He’s 67; his mom is 103 and her funds are depleted. Mom’s doing well. When I speak with her, she tells me things from my past, when we were kids, that I forgot. But my friend can’t retire right now because he has two retirements that he has to take care of. I talk about this in the paper too: Imagine a 30-year-old has a child and that child grows to be 70 and the parents are now 100 — but they had the planning we now do for retirees and they’re broke. Maybe [if longevity predictions come true] the grandparents are 130 and they’re broke, too.

So, when we talk about multigenerational retirement, we’re taking about one generation supporting three generations of retirees — because neither the first child nor the grandchild has an inheritance that could help them as they head into retirement.

Klein: Children often don’t want to use the same advisor as their parents so advisors have to start building relationships earlier with the younger generation. But how can an advisor retain and build their client base, and still make it financially worthwhile, when generations live longer with fewer assets left to go around?

Capizzi: The current advisor, that’s not going to be a concern — they’ll likely be retired. But it means that you have to have more of a relationship with the families. You have to understand the dynamics. Our job is to try to make sure the money doesn’t run right out. In the paper, I talked about adaptive financial oversight: Every single year, the financial advisor has to do a clean sheet, no different than a CFO of a major corporation. The CEO says, “Here are all the objectives we want to do this year; here’s the budget that we need.” And the CFO has to look at that and say, “All right, we’ve got to cut these things out because we can’t afford it. Business has been bad.” Or in the retiree’s case, the market wasn’t good.

It’s not about the plan we put together two years ago; it’s about what does it look like today? If we can do these types of things, then you don’t have the issue of multi-generational retirement, because mom and dad still have assets. And by dividing a client’s assets into portfolios — a distribution portfolio, a flex portfolio for emergencies and funds, a healthcare portfolio and a legacy portfolio — you can have better growth and you’re not risking moving assets from “one bucket to another bucket.” Also, I think it’s easier for the client to understand. We have to look at those type of changes, because, as an industry, the goal is not to have a system where we have retirees that are broke. 

Klein: Say you help a client plan for a 100- or 110-year life and they live to 80. Sure, the money is there, but should the advisor also be thinking about the client who saves for that rainy day and never has the opportunity?

Capizzi: I have a very firm opinion of that: Allow your clients to enjoy their life. It’s not about being frugal; it’s not about making sure they’re not spending money. It’s about planning appropriately from an investment standpoint. I see so many retirees that are the complete opposite of what we think. Rather than spending money like crazy, most of them actually spend too little. That’s where adaptive financial oversight comes in: You’re able to say, “You want to plan two trips this year? Perfect, you’ve got it. It fits the overall plan.” We have to be more CFOs for our clients than just planners.

Jerilyn Klein is editorial director of Rethinking65. This article has been edited for brevity and clarity.