Marc Doss, CFA, CFP, California, Nevada
John Lynch, Mid-Atlantic
David Roda, CFA, Southeast
Cam Hinds, CFA, Great Lakes
Michael Serio, CFA, CAIA, Mt. Northwest
Sean McCarthy, CFA, Southwest
Kei Sasaki, CFA, Northeast
In this Monthly Market Advisor:
Investing in a world of longer lives
Today, the average life expectancy in the U.S. is 84.3 years for a man and 86.6 years for a woman.1 People are also living higher quality lives in terms of overall health and well-being. Many Americans may live three decades or more in retirement. The numbers are more impressive for a newborn child. A child born in the U.S. today has a 50 percent chance of living 100 years.2 A 100-year lifespan is becoming common, and our society must adjust. However, in our opinion, living longer requires more than just investing wisely. It should also include utilizing more holistic services essential to daily living.
One major challenge of longevity is the possibility of outliving your assets. To address this concern, we strongly recommend that investors go through a detailed wealth planning process. This is the first step to your understanding what is required in terms of saving and investing to help achieve your unique goals. From a wealth plan, a detailed investment program can be developed.
Investors have unique financial goals and objectives, but there are some common strategies that can improve the odds of meeting these goals and objectives. One key strategy is to shift away from a purely income-generating strategy to one of total return: income plus capital appreciation. We believe this approach allows for greater flexibility and better suits a longer investing time horizon. This approach frees investors to look across a larger opportunity set of investments. Investors should look beyond bonds and consider investments such as stocks, real estate, and, for qualified, financially sophisticated investors, private capital. This approach allows for return streams that include the potential for not just interest on bonds but also dividends on stocks, income from real estate, and other alternative sources of income. This diversification of return streams potentially offers a better risk and return profile for portfolios in changing economic environments. The pie chart shows an example of an asset allocation that is designed to generate diversified income streams and total return.
Hypothetical diversified income portfolio
Source: Wells Fargo Investment Institute
The emergence of multi-stage lives
The standard framework for a full life span was traditionally broken down into three primary stages:
With the extension of life expectancy, some people may need to move away from these three stages to a multi-stage life. For example, in today’s ever-changing economy, many people may have multiple careers. They may also take extended time away from work to help raise their family or take care of elderly parents. Some may find they need additional education to keep up with an ever-evolving economic landscape. Other workers may have the financial resources to take time off from work to pursue other passions such as charitable causes. Some workers may re-enter the workforce later in life, not for compensation but for the stimulation or intellectual challenge. Multi-stage lives require flexible financial management to account for the possibility of years without wages and a reliance on savings and investments. Financial resources may be needed for additional education. Some people may need to work longer or reevaluate their spending habits in an effort to generate sufficient savings for retirement.
Beyond investment management
In our view, financial and asset management will be critical in this world of longevity. Unfortunately, they may not be sufficient for all the challenges of a 100-year life. For example, how can investors address the needs of an aging parent who can no longer care for themselves? This investor may have a highly demanding career and family life, and may not even live in the same city as their parents. Some investors may have a special needs child who requires additional care and protection for his or her entire life. Such investors may need resources beyond asset management.
A longer life span often equates to additional complexity for investors, especially those with significant wealth. This added complexity could potentially drain the energy and resources needed to generate earnings and savings. In our view, investors who leverage relationships and additional resources are more likely to be successful and enjoy the added time that comes with longevity. Otherwise, they may find that longevity is not a gift but rather a burden.
One example: Life Management Services
Financial literacy normally peaks for people in their 40s and 50s. That is when experience and knowledge combine best with analytical functioning. As the aging process continues, many people will need much greater assistance across a spectrum of needs. Financial protection from elder abuse becomes equally if not more important than asset management. By the time many people are in their 70s, they may often require some form of investment management assistance. And by their 80s, they may find that they will likely need more comprehensive assistance with life management services, such as healthcare planning and coordination, medical claims processing, asset and liability management, and stage-of-life planning.
Conclusion: Embracing the gift of time
A longer life requires greater financial resources and flexibility. Consider the following: 70 years of life equates to 407,680 productive hours while a 100 years of life equates to 582,400 productive hours. (Note: This assumes that someone is active for 16 hours per day and a 52-week year). A 100-year life offers nearly 175,000 more hours of productive time. The extra 30 years of living will likely require many more years of work and savings for most. For some, however, the extra years and hours will mean greater fulfillment in all facets of life. These extra years will require stronger partnerships. In our opinion, these partnerships should focus not just on family, friends, and work. Longer lives well-lived also may require broad financial partnerships. These partnerships should encompass much greater breadth and scope than just investment management. Pursuing financial well-being may require some investors to reach beyond investment management to include life management services. A life well lived will likely be a life well connected.
2 Source: Human Mortality Database, University of California, Berkeley and Max Planck Institute for Demographic Research (Germany), mortality.org
All investing involve risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors some of which may be unpredictable.
Each asset class has its own risk and return characteristics. Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. Investing in small and mid-cap companies involve additional risks from investing in large-cap companies such as limited liquidity and greater volatility. Bonds are subject to market, interest rate, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High yield fixed income securities are considered speculative, involve greater risk of default, and tend to be more volatile than investment grade fixed income securities. Foreign securities entail special risks such as currency, political, economic, and market risks. These risks are heightened in emerging markets. Real assets are subject to the risks associated with real estate, commodities and other investments and may not be suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Real estate investments are subject to special risks including the possible illiquidity of the underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions. Alternative investments trade in diverse complex strategies that are affected in different ways and at different times by changing market conditions. Strategies may, at times, be out of market favor for considerable periods with adverse consequences for the investor. Be sure you are aware of, and understand all risks associated with a particular investment before investing.
The information in this report was prepared by Wells Fargo Wealth Management. Information and opinions have been obtained or derived from sources we consider reliable, but we cannot guarantee their accuracy or completeness. Opinions represent Wells Fargo Wealth Management’s opinion as of the date of this report and are for general information purposes only. Wells Fargo Wealth Management does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.
Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors, and other Wells Fargo Affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.
Wells Fargo Wealth Management provides products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries. Wells Fargo Bank, N.A. (the “Bank”) offers various advisory and fiduciary products and services. Financial Advisors of Wells Fargo Advisors may refer clients to the bank for an ongoing or one-time fee. The role of the Financial Advisor with respect to bank products and services is limited to referral and relationship management services. The Bank is responsible for the day-to-day management of non-brokerage accounts and for providing investment advice, investment management services and wealth management services to clients. The Financial Advisor does not provide investment advice or brokerage services to Bank accounts, but does offer, as applicable, brokerage services and investment advice to brokerage accounts held at Wells Fargo Advisors. The views, opinions and portfolios may differ from our broker dealer affiliates.
This report is not an offer to buy or sell, or a solicitation of an offer to buy or sell the securities or strategies mentioned. The investments discussed or recommended in the presentation may be unsuitable for some investors depending on their specific investment objectives and financial position.
Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company. Wells Fargo affiliates may be paid a referral fee in relation to clients referred to Wells Fargo Bank N.A.
Additional information is available upon request
© 2017 Wells Fargo Bank, N.A. All rights reserved.