Will You Outlive Your Savings?

The desire to live longer — and outrun death — is ingrained in the human spirit. The first emperor of China, Qin Shi Huang, may have even drank mercury in his quest for immortality.

Over time, advice for living longer has become more practical: eat well, get regular exercise, seek medical advice. However, as life expectancies increase, many individuals will struggle to save enough for their lengthy retirement years.

Today’s infographic comes from New York Life Investments, and it uncovers how holding a stronger equity weighting in your portfolio may help you save enough funds for your lifespan.

Longer Life Expectancies

Around the world, more people are living longer.

Despite this, many people underestimate how long they’ll live. Why?

• They compare to older relatives.
  Approximately 25% of variation in lifespan is a product of ancestry, but it’s not the only factor that matters. Gender, lifestyle, exercise, diet, and even socioeconomic status also have a large impact. Even more importantly, breakthroughs in healthcare and technology have contributed to longer life expectancies over the last century.
• They refer to life expectancy at birth.
  This is the most commonly quoted statistic. However, life expectancies rise as individuals age. This is because they have survived many potential causes of untimely death — including higher mortality risks often associated with childhood.

Longevity Risk

Amid the longer lifespans and inaccurate predictions, a problem is brewing.

Currently, 35% of U.S. households do not participate in any retirement savings plan. Among those who do, the median household only has $1,100 in its retirement account.

Enter longevity risk: many investors are facing the possibility that they will outlive their retirement savings.

So, what’s the solution? One strategy lies in the composition of an investor’s portfolio.

The Case for a Stronger Equity Weighting

One of the most important decisions an investor will make is their asset allocation.

As a guide, many individuals have referred to the “100-age” rule. For example, a 40-year-old would hold 60% in stocks while an 80-year-old would hold 20% in stocks.

As life expectancies rise and time horizons lengthen, a more aggressive portfolio has become increasingly important. Today, professionals suggest a rule closer to 110-age or 120-age.

There are many reasons why investors should consider holding a strong equity weighting.

1. Equities Have Strong Long-Term Performance

   Equities deliver much higher returns than other asset classes over time. Not only do they outpace inflation by a wide margin, many also pay dividends that boost performance when reinvested.

2. Small Yearly Withdrawals Limit Risk

   Upon retirement, an investor usually withdraws only a small percentage of their portfolio each year. This limits the downside risk of equities, even in bear markets.

3. Earning Potential Can Balance Portfolio Risk

   Some healthy seniors are choosing to work in retirement to stay active. This means they have more earning potential, and are better equipped to recoup any losses their portfolio may experience.

4. Time Horizons Extend Beyond Lifespan

   Many individuals, particularly affluent investors, want to pass on their wealth to their loved ones upon their death. Given the longer time horizon, the portfolio is better equipped to ride out risk and maximize returns through equities.

Higher Risk, Higher Potential Reward

Holding equities can be an exercise in psychological discipline. An investor must be able to ride out the ups and downs in the stock market.

If they can, there’s a good chance they will be rewarded. By allocating more of their portfolio to equities, investors greatly increase the odds of retiring whenever they want — with funds that will last their entire lifetime.

Periodic Table of Investments

The investment universe is vast, but it’s also made up of many smaller moving pieces.

For serious investors, the foundation of the discipline is to understand the properties of these individual components, and to have them work in harmony to achieve a specific portfolio goal.

To do this successfully, one must understand the breadth of asset classes, tactics, and categories of investments that exist – and to know how they relate to one another.

The Chemicals Between Us

Today’s infographic comes from Phil Huber, the Chief Investment Officer for Huber Financial Advisors, who has cleverly depicted this relationship graphically in his blog.

Similar to how the physical universe is made up of chemical elements, he sees the possibilities around portfolio management as drawing from a broad pool of investing “elements”. Combine these different elements together, and you get compounds, structures, and eventually entire funds.

The periodic table of investments created by his team denotes each type of investment, the primary and secondary strategy related to it, and a color classification:

Here are the seven objectives that the top letters on each box refer to:

And finally, here are the colors that each block on the periodic table correspond to:

As you can see, considerable thought has been put into the categories and classifications. However, as Phil notes, this is simply the opinion of one person and it is not intended to be a universally accurate depiction of all portfolio management wisdom that exists:

I fully expect that there are a handful of omissions, or perhaps a few areas where one might flat-out disagree with how I’ve laid things out. This was not meant to be 100% exhaustive, nor was it meant to be indicative of what one of our portfolios looks like.

Phil Huber, Chief Investment Officer

For more of the lessons that can be derived from this clever periodic table of investments, we suggest checking out the original post on Huber’s blog.

Is there anything that he missed, or that you think could be classified better?