Most of your clients probably have a picture of retirement that goes something like this—golf, beaches, vacations, relaxation. In fact, retirement portfolios usually focus on generating income to enjoy during the golden years. But as more Baby Boomers age and retire, Joseph Coughlin, and expert from MIT, says the longevity landscape is evolving, and portfolio construction strategies need to change with it.
"The longevity landscape is changing profoundly," Coughlin says. "In the year 1900, life expectancy was 47. Today it’s easily 85… The fastest growing group are people age 85 and older. So we have a new customer out there."
Coughlin says it's not just about clients living longer. The average Baby Boomer expects a lot more out of retirement than generations before them. They've been sold a picture of a worry-free retirement filled with luxuries and vacations. But that may not be the reality for all of their retirement years.
"Construction now has to include that first vision of retirement, which is the early years where health is good and wealth is plentiful," Coughlin says. "But then we have to have a portfolio that goes for the next level, which is maybe you’re not working part time. Income level drops. Maybe, frankly, you’re not feeling like you want to travel, for a variety of reasons. Then there may be a third phase of retirement that portfolio construction should reflect as well, where frailty and financing to live alone or maybe move into senior housing and have care brought to you or to a loved one. So having a portfolio that goes through stages of retirement and not just one vision of longevity is what people are going to have to plan for."
He adds that advisors need to think more creatively about linking products to the needs clients will have in old age.
"Imagine purposeful annuities, for instance, that might link to household maintenance or modification so people can see the linkage between saving today and precisely what I’ll get tomorrow," Coughlin says. "Not an income stream, but the ability to stay in my home. The ability to provide care for a loved one. The ability, frankly, to go back to school to be able to work longer as part of my retirement plan. So product innovation is as important in the disruptive demographics as consumer driven innovation."