Capitalist Investor

The Financial Issues That Come with Longevity, Ep. 287

• Strategic Wealth Partners

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In the latest episode of the "Capitalist Investor" podcast, hosts Derek, Tony, and Luke dive deep into some critical issues that impact financial planning and investment strategies. This episode is a goldmine for anyone looking to understand how longevity, inflation, healthcare expenses, and financial planning intertwine to shape our economic futures. Here are the five hot topics discussed:
1. The Impact of Longevity on Retirement Planning
Tony emphasizes the significant impact that increasing longevity can have on financial planning. As people live longer, the financial strain on retirement funds intensifies. Financial planners must account for the possibility that clients may outlive their savings. Traditional models that assume a static spending rate throughout retirement become obsolete when you factor in the realities of increased lifespans and corresponding expenses.
2. Inflation and Its Role in Financial Planning
The episode dives deep into the role of inflation in financial planning. Luke highlights a crucial misconception: many people fail to understand that inflation and the economy are intrinsically linked. He explains that a strong economy with limited supply leads to inflation, while a weak economy with excess supply leads to deflation. This economic backdrop necessitates a dynamic approach to financial planning, where inflation projections are continually updated to align with current economic conditions.
3. Healthcare Expenses in Retirement
Tony stresses that healthcare expenses rise faster than general inflation, making them a significant factor in financial planning. As medical technologies and services become more expensive, retirees must allocate a considerable portion of their nest eggs to cover these costs. Ignoring these escalating expenses could jeopardize an otherwise sound retirement plan.
4. The Importance of Proactive Financial Planning
A recurring theme in this episode is the importance of being proactive in financial planning. Luke criticizes the often-static approach many advisors take, urging for a more dynamic and responsive strategy. Given the ever-changing economic landscape, financial plans should be revisited and adjusted at least annually. Inputting new numbers and projections into financial plans ensures they remain relevant and effective.
5. The Debate Over Fixed Income and Investment Returns
There is also an interesting discussion about fixed income and investment returns. With fluctuating Federal Reserve rates, the attractiveness of different investment vehicles changes. Luke points out that although cash might be yielding high returns now, expected rate cuts could lower those returns in the future. Similarly, Tony mentions that financial plans should use conservative return projections, arguing against overly optimistic assumptions that fail to account for market volatility.

This episode of the "Capitalist Investor" offers valuable insights into how longevity, inflation, healthcare costs, and market conditions should influence financial planning. The hosts underscore the need for a proactive and adaptable approach, given the fluidity of economic conditions and personal circumstances. For anyone serious about fortifying their financial future, these discussions are invaluable.
Stay tuned for more episodes where Derek, Tony, and Luke bring you expert perspectives and actionable advice to navigate the complex world of investments and financial planning. If you have any comments, questions, or topic suggestions for the podcast, feel free to reach out @swpconnect.com.

Hello and welcome to this episode of the Capitalist Investor. As always, you have me, Diamond Hands D, and we got the whole crew together again today. Tony the tiger, cool hand Luke. What's going on, guys? What's going on? All right, let's get into it. Yeah, we got the. The planning corner. And that would be how longevity is a snowballing impact on your retirement. Yep. You know, you can't beat father time, but, man, father time can definitely beat down on you. Yeah, that's true. Physically, mentally, I feel it, but financially, too. And let's talk about the financial issues that come with longevity. So I'll start it off like, the first thing is. First is inflation. You know, things just don't stay the same price. Things go up, hopefully when items that we buy go up, hopefully we make more money. Right. Wages inflate, things like that. And we. I gotta say, I'm real sorry to interrupt. I have to say this. Oh, boy. I woke up this morning, I know we just talked about the debate a couple episodes ago, but I did wake up this morning, talk, and to a person I went to college with that is an extreme liberal, and their exact comment was, he's actually one of the most disgusting, selfish human beings ever who disrespects the military, and somehow people who claim to love the USA will vote for him because they don't understand how the economy works. PSA. The economy and inflation are not the same thing. The economy and inflation are not the same thing. That's what they tweet. That's what they tweeted. Huh. So the economy and inflation are the exact same thing because they go hand in hand. Strong ish economy with low supply, output is inflationary. A weak economy with a large supply, output is deflationary. So it goes hand in hand. So this is why politics do matter when it comes to inflationary pressures and thinking about the future. So when it comes to inflation and financial planning and everything else, we have to plan around what we think is going to happen from a government entity, output that's impacting the economy because they do go hand in hand. I can't believe someone said the economy, inflation do not go hand in hand. That's the problem with the debates. You're going to educate that person at some point in the day. I almost commented, it's not worth my time. So. All right, coming back here. What this means, though, is that when you build a financial plan, whether you're working with a financial advisor or doing this on your own, you have to build in inflation. You just can't say, hey, I spent 50 grand a year this year, and then I'm going to run that for the next 30 years because that's what I'm going to spend. You got to inflate it every year because, again, that loaf of bread, that gas that you put in your cardinal, all this stuff continues to increase year after year after year. It's an invisible force. It doesn't usually hit you in the face, unlike the last three or four years, but it does go up, and it usually goes up at around two to three, 4% per year. When we build our plans, we use, what, 3% inflation the last ten years has been way below that. In the last couple, you know, two, maybe two, three years. It's been above that. You know, we expect it to normalize again somewhere around three because that's what it has been historically. Yep. The other thing is the next longevity is healthcare expenses. This stuff is going up higher than what I just talked about. You know, the skilled nurses, the technology, the research and development, all that stuff isn't for free and it's not cheap. So healthcare expenses are also going up. And again, sometimes when you're building your financial plan for longevity, you're not taking in consideration healthcare cost and then, but also the above and beyond inflation that goes along with it. So again, something else we need to really look into and just, I'm sorry, account for, not look into, but account for, because we're all going to need it. And then the last thing is longevity. It will obviously, you know, dig into your. Your nest egg a lot faster as you get older because, again, you have to. That's why you can't buy a mattress and shovel all your money into this mattress. And when you retire, your money needs to continue to work for you in retirement because you can't. This is the only way to prevent outliving your savings. Now, if you've done a great job, savings or saving and you feel that like, hey, I got a, you know, I got$2 million and I only take out 40 grand a year. Right. What is that, 2%? Right. That's like 2% of the whole thing. Like, hey, that's under the threshold of, you know, taking out, you know, the 4% rule. Right, right. But that. That 40 grand that you're taking out will be 42 the next year, and it'll be 44 the next year after that. So it will increase. So that's why, again, you can't just park your money and be completely safe because you will run out of money at that pace because inflation doesn't stop. So inflation does stop potentially. I don't want to think about, and I don't want to go too far off. There is deflation, but. But let's say the recession happens. If you look to history cycles throughout since the Great Depression, they've gotten smaller and smaller. Recessions have gotten smaller and smaller because bailouts, the government will lower rates or whatever it be, and then re spark the economy and try to bring inflationary pressure back to actually grow us back out of the recession. If we do believe a recession is, I know we're thinking 30, 40 years down the road, but if we do think a recession is around the corner, there's always a potential factor of deflation. And deflation is actually worse than an inflation because it means the economy is so bad. Unemployment's up a lot. People just have no money to spend, not buying anything to spend throughout the. Economy, supply is plentiful. My point is, when you build a financial plan for a 30, 40 year period, things that happened last year are completely different than they are this year. A lot of conversations I'm having with clients right now, I'm like, hey, we need to refresh your financial plan. We built your plan a year ago. Once that one year anniversary comes around, like, we need to get you back in the plan refresh process because we need to re account for the changing environment and things. We need to either up that inflation target or lower that inflation target, or we need to adjust it for the first, next couple of years, and then we get back on the three, two. 3%, or adjust your expenses, which is the most important number in your plan, because if we accounted it to grow at 3%, but it really grew at five or ten, well, this is the. Whole problem I have with this industry. Sometimes it's like most advisors will be like, throw your money in the market for 30, 40 years, earn 7% compound, and you're fine. I've talked about that before. Or it's like, hey, just use a 3% inflation target for 30, 40 years and that's all you need to do to account for inflation. Well, let's actually, as time goes on and evolves and changes, let's make sure we're actually inputting the new numbers, projections into your plan. And not enough people are proactive. They really aren't. A lot of advisors aren't proactive enough. And that's one thing you have to make sure. Like, sometimes it's on the clients to be proactive. If you don't think your advisor's on top of stuff. Make sure that you talk to them about things that you're seeing in the world and ask them questions about that. Right. It's a team effort. Well, think about how much thought they might put into their financial plan. I saw this in a plan that I looked at recently, and they gave, this is a plan built by another advisor, and they gave the plan around a 7% rate of return, but they based that 7% off of 30% bonds and 70% to 30% to bonds and 70% to stocks. And I pointed this out. Now, for the typical non advisor client, it's not their job to understand that. But I'm like, your advisor is giving you a high rate of return with low volatility. That is exactly what I tried to explain. And I went around about three different paths. I'm like, your plan is probably not showing enough volatility, and you're actually maybe giving yourself too much rate of return, because the last ten years have done 10% rates of return on an annualized basis. Well, a lot of people right now, conversations I'm having is like, why can't I just own cash? Cause I'm earning 5% right now on my savings account. Well, okay, well, if the Federal Reserve. In one year, well, that's the thing. If federal Reserve is projected to rate cut eight or nine times over the next year, that 5% is probably closer to two or 3% by the end of next year. Right? So if that's the case for that fixed income bond alternative bucket, I know internally here, people that have had annuities, like five years ago, we've replaced a lot of those annuities because the rates are a lot better. Because national insurance companies can invest in long duration bonds at 4.55%. So they're making more money. They're able to pay out people more money. So those annuities that you got five years ago, probably a little juicier now, and there's probably opportunity for you to replace those. So, like, it's just, there's all this kind of thought process. The proactiveness is so important, and what's currently the environment now is going to be completely different down the road as we've seen the past four years. Building your plan, like one of the. I have always, I always tell this every time I explain a new plan that we represent and even to current clients to remind them. We build a lot of conservatism inside the financial plan we have. You live in a 95 when the average is 85. So I'd be living ten years longer. That means your money needs to last ten years longer. And I'm also designing the plan at five and a half percent with a typical 60 40 kind of portfolio. Because if I use the last ten years, which some advisors do, they just take the default option, and default option will show historical rates of return. Everyone. No one needs a financial advisor if the market goes up like it did the last ten years. No one needs that. Right. But the last ten years, I think, have been a real anomaly where it's not expected. Yeah, when you have rates of 0%. So we use expected rates of return and hope that we overshoot. But if we don't, we're building a plan that is built for lower rates of return compared to the last ten years. Well, longevity, to give my final thoughts on the longevity component that you kind of hit on is no one has a crystal ball. What I do know is I think the average age has, has actually gone down for the first time, like last year. Like, the average longevity actuarial tables went down a little bit. So society, you got to think about, like, you know, health within a society, behavioral things, what's going on. You have to adapt to that change as well. Like, I think the average male lives, what, 82 and the average female lives 84. Like, that's kind of the actuarial tables depending on what your age is currently. But if we do see that people are getting unhealthier, people are living different lifestyle. Covid, you definitely saw a spike in mental health issues. You definitely saw a spike in more drug and alcohol use, things like that. If you see as a society that's declining in age, you have to adjust your financial plan as well. I'm not saying that's going to happen forever, but you have to be aware of that when you're talking to, especially those younger clients to, for the next 50 or 40 years, right? Yep, absolutely. All right, well, you have one last word. No, no. Well, if you guys have any comments, questions, show ideas, topics for the planning corner especially, hit us up at info connect.com and we'll talk to you next week. The opinions expressed in the podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any investment, legal, financial, or tax strategy. It is only intended to provide education about the financial industry. Please consult a qualified professional about your individual needs.