Place Looms Large in Managing Longevity Risk

The good news is that we are probabilistically expected to live longer than prior generations. The bad news is that we are probabilistically expected to live longer than prior generations.

Analysts call this longevity risk. The risk of living longer than planned.

Most people do not want a lifespan without sufficient wealthspan, the number of years in good financial health, and healthspan, the number of years in good physical and mental health. However, we have agency throughout our lives to optimize healthy longevity, and place looms large with its possible interventions.

Is Your Three-Legged Stool Wobbly?

In a recent webinar hosted by the Stanford Center on Longevity, Jason Fichtner, Executive Director of the Alliance of Lifetime Income’s Retirement Income Institute and Chief Economist of the Bipartisan Policy Center, spoke of the three-legged stool of income for retirement: (i) social security, (ii) defined benefit savings/defined contribution plans and (iii) private savings. In prior generations, when people didn’t live as long, the number of years in retirement – requiring income – was shorter. For example, in 1970, the life expectancy at the average age of retirement for OECD countries was approximately 12 and 16 years for men and women, respectively. Approximately fifty years later, the figure is approximately 20 and 24 years for men and women, respectively. That’s approaching a decade of extra life to enjoy and fund.

At the time, the funding vehicles to support long lives are under stress. Social security was not intended (and, therefore, funded) to support such extended retirements. In 1935, when social security was implemented, life expectancy at birth was in the low 60s; today, it is approaching 80. Defined benefit plans have given way to defined contribution plans where responsibility has shifted from the employer to the employee. Many of yesteryear's defined benefit plans (i.e., pensions) look exceedingly generous compared to today’s standards. This leaves a greater onus on private savings, which are underfunded for many, particularly if lifespan gains continue.

For a number of us, the three-legged stool is wobbly.

The Critical Role of Place in Managing Longevity Risk

Place has a critical role in helping manage longevity risk. While home ownership is desirable for many and weaved into the American Dream, we must recognize that housing is a cost, even as an investment. Paying attention to the total cost of ownership can be revealing.

For young people, high housing costs compounded over many years can materially impact savings for retirement, the third leg of the retirement income stool.

For older people, unused or underutilized square footage can be a hidden cost that contributes to a higher-than-necessary expense load. Consider the cost to maintain, furnish, and heat/cool underutilized spaces. Calculating these costs can be revealing.

One remedy, particularly for people in the second half of life, is to consider downsizing to match the needs of the current life stage. However, downsizing doesn't necessarily lead to lower costs in today’s higher interest rate environment and elevated housing prices. A big capital-gains bill can also be a factor if one sells a home with dramatic property appreciation. (See recent Wall Street Journal article “Boomers Bought Up the Big Homes. Now They’re Not Budging.” for more detail.)

Another consideration is to flip from home ownership to rental. This approach benefits homeowners by investing home equity in more diversified investment vehicles and eliminating the risk of having too much exposure to one illiquid asset (e.g., your home). This tactic may be able to match costs to income closely.

How Should You Consider Place in Optimizing Your Healthy Longevity?

It would be foolish only to consider the cost of housing. Your place is foundational to your health and well-being as it influences your purpose, social connections, physical well-being, and mental health. Feeling out of place and not at home has a real, if not quantifiable, cost.

At the same time, in the Age of Longevity, where living to 100 and beyond will become less improbable, paying attention to housing costs will matter for many of us. It is easy for housing costs to exceed the “30% rule”, which suggests that housing expenses should not exceed 30% of gross income. This guideline includes rent or mortgage payments, property taxes, homeowner's insurance, and utilities. These costs, compounded over time, add up considerably.

There is no perfect answer for managing longevity risk, but doing the math matters. Remember to include place in the equation for a healthy, long life.