Introduction:

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Life expectancy is on the rise, leading to longer and healthier lives. With global investments in longevity reaching new heights ($5.2 billion in 2022), there's a growing focus on extending not just lifespan but also health span.

The prevailing belief is to gradually reduce risk exposure and shift towards conservative investments as retirement approaches. But most people in the western world are still retiring at 67 years old whereas life expectancy has increased by 5 years over the last three decades.

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Vanguard founder John Bogle advocated using the formula of 120 minus one's age to determine equity allocations. This approach of maintaining a more conservative risk profile before retirement is still implemented by most professionals while it may not always be the optimal choice in the face of increasing life expectancy.

As retirement approaches, it's important to reconsider the traditional approach of reducing risk exposure and shifting towards conservative investments.

In this article, we explore key considerations for rethinking risk profiles in the face of increasing life expectancy.

 

Longevity Discourages Market-Timing:

With longer life expectancies, retirees have more time to benefit from growth-oriented investments. Maintaining a higher risk profile can tap into compounding returns and potentially achieve higher long-term gains. By avoiding dramatic allocation shifts in response to market moves, individuals can resist the temptation of market-timing and leverage the benefits of maintaining a growth-oriented approach.

 

Define Your Family "Bucket List":

Redefining your "bucket list" involves separating funds that won't be needed until after passing and allocating them, at least in theory, to a next-generation bucket. This approach involves managing funds with a longer horizon time, as if they already belong to your children. Additionally, it's crucial to set aside spare money for unexpected medical expenses, ensuring financial preparedness for any unforeseen circumstances.

 

Protecting Against Inflation:

While recent interest rate fluctuations may have created uncertainty, it's important to consider the long-term effects of inflation. Growth-oriented assets can help individuals protect their wealth against the erosive effects of inflation. By retaining a portion of the portfolio in assets that have the potential to outpace inflation, individuals can ensure their funds retain their value throughout a longer retirement.

 

Embracing Diversification:

Diversification remains the key to reducing risk without necessarily sacrificing returns. Nobel Laureate Harry Markowitz famously stated that diversification is the only free lunch in finance. Regardless of age or proximity to retirement, individuals should adopt a dynamic approach to periodically reassess and adjust their investment strategy. By embracing diversification, individuals can effectively manage risk and optimize returns.

 

Conclusion:

As life expectancy continues to rise, it's essential to rethink risk profiles before retirement. Embracing a growth-oriented approach, defining family "bucket lists," considering inflation, and embracing diversification are crucial steps in achieving long-term financial security. By challenging conventional wisdom and adapting investment strategies to align with increasing life expectancies, individuals can better navigate the complexities of retirement planning and ensure a prosperous future.