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.
|Year||Life Expectancy at Birth, World|
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.
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.
- 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.
- 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.
- 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.
- 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.
Opportunity Zones: Aligning Public and Private Capital
Opportunity zone funds (OZFs) can help the neighborhoods that need it most, while also providing significant tax benefits for investors.
Opportunity Zones: Aligning Public and Private Capital
At the end of 2017, a potential $6.1 trillion in unrealized capital gains was available for reinvestment.
Throughout the U.S., unrealized capital gains have significant tax implications with enormous potential. Unrealized capital gains occur when the value of an asset has gone up on paper, but has not yet been sold for a profit. Taxes are triggered once the asset has been sold.
Investors can offset or defer these taxes in a few ways, including one new strategy: investing in opportunity zones.
Today’s infographic from Bedford Funds explains what opportunity zone funds are, their core benefits, and their potential impact across the country.
What is an Opportunity Zone?
Opportunity zones are U.S. Census tracts whose citizens experience economic distress.
Originating in the 2017 Tax Cuts and Jobs Act, they offer the potential to connect long-term capital with low-income communities across the country to drive return and impact.
How are opportunity zones chosen? The initial base is low-income census tracts, which have:
- Poverty rates of at least 20%; or
- Median family incomes lower than 80% of the surrounding area
The state’s governor or chief executive then nominates up to 25% of these areas as opportunity zones. Nationwide, a total of 8,700 opportunity zones exist, and 7.9 million of the areas’ residents live in poverty.
Overall, 35 million people live in these opportunity zones. There are a number of disparities between opportunity zones and notional averages across key variables:
|Poverty Rate||Median Family Income||Education*|
*Adult with Bachelor’s degree or higher
It’s evident these cities could benefit from increased investment.
What is an Opportunity Zone Fund?
An opportunity zone fund (OZF) is an investment vehicle that provides tax benefits for private capital to help revitalize economically distressed communities. Both operating businesses and real estate are eligible for investment.
Many investor types may take advantage of opportunity zone funds:
- Corporations– Also includes partnerships
- Accredited investors– Defined as high net worth individuals, brokers, and trusts
- Nonresident foreign investors– Only on capital gains earned in the U.S.
- Retail investors– Through funds that have lower minimums, though options are more limited
In addition to their wide eligibility, OZFs have a number of potential benefits.
Tax breaks on capital gains can be organized into three tiers:
- Initial Tax Deferral– Once the previously-earned capital gains are channeled into a qualifying OZF, federal tax is deferred until December 31, 2026 or the date the investment is sold— whichever comes sooner
- Step-Up In Basis– 10% of the original capital gains will be excluded from federal taxes if an investment is held for five years
- Capital Gains Tax Exclusion– Federal tax on capital gains earned within the OZF is 100% eliminated if an investment is held for 10 years
All things being equal, OZFs realize after-tax outcomes that are over 40% higher than a standard portfolio investment. For example, the potential after-tax value of a $100 investment after a 10-year holding period would be as follows.
|Initial Investment||Net after-tax value|
|Standard portfolio investment||$76.20 ($100- 23.8% capital gains tax)||$132.36|
*Note: assumes long-term federal capital gains tax rate of 23.8%, no state income tax, and annual appreciation of 7% for both the OZF and alternative investment.
While it takes a few years to realize these tax benefits, OZFs have long-term horizons to encourage sustained investment with a lasting impact. The result is the potential for sustainable and equitable wealth creation.
Although real estate investments have captured significant attention, recent regulation has clarified that operating businesses are also eligible OZF investments.
By investing in businesses, OZFs can have a direct impact on economic growth and job creation.
Ultimately, OZFs have the potential to catalyze collective impact through their scalable operating company and real estate investments. Working directly with community leaders, OZFs can help drive long-term rejuvenation from within, versus gentrification from outside forces.
Opportunity zone funds are projected to raise $44 billion in capital designed specifically to invest in this future growth.
Bridging the Gap: Wealth Isn’t Just for the Wealthy
The UK has a financial adviser gap, leaving about 51 million adults without advice. Learn how wealthtech makes investing accessible for everyone.
In the UK, money is the #1 cause of stress—ranking above physical health, work, or family.
When people begin investing, they see immediate emotional benefits compared to non-investors. In fact, investors are 16 percentage points happier, and 23 percentage points more positive about their well-being.
However, only 37% of Brits hold market-based investments. So why aren’t more people taking steps to invest? Today’s infographic from BlackRock outlines the barriers people face, and how wealthtech can help address these issues at scale.
The Wealth Problem
A variety of hurdles keep people from taking control of their finances.
- Lack of Resources: 59% of Brits feel they don’t have enough money to invest.
- Lack of Knowledge: 39% say a lack of knowledge holds them back.
- Fear of Failure: 34% are afraid of losing everything if they invest.
All of these factors culminate in insufficient investing. In fact, 50% of the €26 trillion European wealth market is currently in uninvested cash, earning zero interest.
What’s the Current Solution?
Traditionally, investment advisers helped tackle these issues. However, investors have faced challenges accessing professional advice in recent years.
A shortage of UK advisers is a main contributing factor:
- There are only 26,700 advisers, who can service an average of 100 clients each.
- This leaves over 51 million adults without professional advice.
Among available advisers, many impose investment minimums or fees that create barriers for lower-income populations. Financial advisers charge an average of £150/hour, and half of all surveyed advisers turned away clients with less than £50,000 to invest.
With so many hurdles to overcome, how can Brits take charge of their investments?
A Modern Solution
Wealth technology—or simply wealthtech—helps address these issues at scale, offering four main digital-first solutions:
- Helps investors build better portfolios.
Gone are the days of rudimentary spreadsheets. With the help of algorithms and machine learning, investors can now automatically build sophisticated portfolios.
- Helps advisors scale their services.
The automation of time-consuming processes allows advisers to service more clients.
- Reaches more people.
Wealthtech is accessible for all, not just the wealthy. For example, micro-investing apps allow investors to make small, regular contributions without paying a commission.
- Modernises infrastructure.
Wealthtech updates old legacy systems with more streamlined, automated systems. As a result, paper-based processes are replaced with mobile transactions that can be done with the click of a button.
These benefits can be applied across various branches of wealth management.
The Wealthtech Ecosystem
Investors can choose one of three main paths, based on their level of knowledge and interest.
“Do It Yourself” Investing
Confident investors who enjoy managing their own money can trade securities through self-directed online platforms.
“Do It For Me” Investing
Novice investors can use platforms that execute trades on their behalf, such as micro-investing or robo-advisers.
“Do It With Me” Investing
For investors in the middle of this spectrum, certain platforms offer a hybrid of digital transactions and professional advice.
With a wide variety of solutions available, investing has never been easier.
It’s clear Brits are open to the shift: 64% say new technology would help them be more involved in their investments.
As wealthtech evolves, it will be seamlessly integrated into daily life as part of a holistic financial services offering. Traditional barriers will be broken down, empowering individuals to take charge of their financial future.
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