Money Matters

Will You Outlive Your Money?

Americans are increasingly haunted by that fear. And as financial journalist Richard Rescigno reports, many should be.

By Richard Rescigno December 27, 2017 Published in the January 2018 issue of Sarasota Magazine

Methuselah was lucky. The Biblical stalwart lived 969 years without any reported money worries. Like him, many Americans now survive to an advanced age—although nowhere near the record set by the man who might have been the only true millennial—but they’re not as fortunate. Many are stalked by fear of outliving their financial assets. Sometimes, that concern is justified; often, it’s irrational. But, in the minds of the worriers, it’s always palpable and, frequently terrifying.

A 2016 survey of 4,500 people by TransAmerica, the big insurance and investment outfit, found that the top retirement fear of respondents, regardless of age, was exhausting their money before death. The second and third most common concerns were related to the first: Social Security going bust, or their health deteriorating, leading to medical expenses that would pauperize them.

Says Kathleen Gurney, a psychologist and authority on behavioral finance, “These fears are much more prevalent today than they once were. People are living longer. They don’t have defined-benefit pension plans. Health insurance is another big problem. People once felt that Medicare would be enough to take care of them if they got sick when they got old. That’s not the case anymore.”

Through her Sarasota-based Financial Psychology Corp., Gurney works with individuals, investment firms and financial advisers around the globe, to help clients shepherd their finances and abandon destructive spending and investing habits. A former professor at the University of Southern California, Gurney has had private practices at places including Beverly Hills, where she found that the reaction to money concerns, even unfounded ones, can be self-defeating. “I’ve worked with wealthy women who say: ‘I’m really afraid that I’m going to be a bag lady. That fear keeps me up at night.’ What some do is use something psychologists call the manic defense,” she says. “They do just the opposite of what they should be doing. They go shopping. What they’re saying is: ‘I’m crippled by this fear, so I’m just going to go out and do something that helps me avoid it.’”

In places like Sarasota, a magnet for affluent retirees, concerns about winding up impoverished can be exacerbated by the urge for status. “Some people simply don’t have enough assets to maintain the big house or the big cars they don’t really need anymore,” she observes. In addition, the area’s reputation for philanthropy “puts pressure on people to be altruistic when perhaps they can’t afford it. Then they’re left with the reality: ‘Here I am. I really don’t know if I have enough’ to live comfortably through their remaining years. Sometimes, the cure is simply convincing them to live within their means.”

On the other hand, plenty of people—think now of Sarasota’s legions of waitresses, cashiers, stock clerks, landscapers, pool and house cleaners, handymen and low-skilled construction workers—have more intractable cause for worry.

While much has been made of growing income equality in America, its twin—rising retirement inequality—might be more pernicious. Statistics about retirement income vary, but finding a forecast pointing to a happy outlook for most of the U.S. population is impossible.

An ominous study was published in 2016 by the nonprofit Economic Policy Institute, a think tank in Washington, D.C. It found that almost half of Americans have no retirement savings and that, in 2013 (the most recent year with comprehensive data at the time), the median retirement-account balances for most age groups were lower than they had been in 2000, because of the Great Recession. The study indicated that while the average savings of U.S. families with working-age (32 to 61 years old) members was $60,000, the median was a pitiful $5,000. Why the huge difference? The accounts of the well-off and wealthy boosted the average—those in the top 1 percent had at least $1.08 million—while the meager, or empty, accounts of those at the bottom dragged down the median.

The most worrisome conclusion: For families with working-age wage earners, participation in retirement plans—IRAs, 401(k)s, traditional pensions, etc.—slid from 60 percent in 2001 to 53 percent in 2013, pointing to even worse trouble ahead. Already, 25 percent of retired Americans list Social Security as their sole source of income. The average benefit in 2017: $1,369 a month, or $16,428 a year, not exactly the stuff of Dom Perignon and jaunts to Ibiza.

Lengthening lifespans compound the retirement challenge. According to the Social Security Administration, anyone who reaches 65 now can expect to live past 85. And by 2035, the agency estimates, there will be 79 million Americans at least 65 years old, versus 49 million today.

Says Julio Castro, a Tampa-based partner and wealth adviser for Evercore Wealth Management’s Florida unit, “We’ve got a couple of clients over 100. They’ve given us a dose of reality.” Many people approaching or in retirement, he observes, “are focused on the next five or 10 years, instead of the next 20 or 30. We tell them that while their actuarial model may say they’ll live into their 80s or 90s, they should plan on living to 100 or 100-plus.”

Many who make it into their 80s, 90s or even just late 70s need long-term care.

An especially expensive scourge: dementia, now the sixth most common cause of death in the U.S. The elderly aunt of a friend of mine pays more than $15,000 a month at a memory-care facility in Massachusetts. (Medicare generally doesn’t cover long-term care.) Getting such services in low-wage Florida is usually cheaper, but still onerous.

Just ask Dick Pell, 84, a retired entrepreneur whose wife of more than four decades, Helen, died from Alzheimer’s disease in November. He recalls her as “a vibrant woman with a great sense of humor, a great cook, an excellent sailor—better than me—and an extraordinary friend and partner.”

After she was diagnosed in 2009, he cared for her in their Sarasota home, with the help of aides. But after he suffered bouts of heart disease and cancer himself, his children convinced him that he couldn’t do that anymore. (A YouTube video done two years ago, to accompany a Money magazine article on dementia, points to the depth of the Pells’ long relationship.)

In the last nine months of her life, Helen lived at Arden Courts at Sarasota, a small memory-care facility.

“It cost $5,600 a month,” Pell says. “She insisted, about 15 years ago, that we buy long-term care insurance, which we did. But that only paid for a piece of her care—about $3,330—so we had to make up the rest.” 

Pell, who was both successful and prudent during his working years, says that he’d never felt anxious about his finances until the couple’s health problems erupted. Then he did worry, in part because no one knows how long the costs associated with Alzheimer’s will go on. The average survival time from diagnosis is eight years, but some victims have held on for one or even two decades. In addition, he says, during 2007 and 2008, as the global financial crisis gathered and then struck with devastating force, “I lost about a third of our capital in bad REITs [real estate investment trusts]. I couldn’t afford to lose any more money.”

Now, with only himself to care for, he believes that returns from a high six-figure stock portfolio, plus other income, will be sufficient throughout his lifetime. His holdings have returned 8.2 percent a year, after fees, since he began investing with Rudd International, a Sarasota money-management firm, shortly after it opened in mid-2012. “That’s pretty damn good. I certainly couldn’t do that well on my own,” he says. But he’s not complacent. “Here’s the hook: This stock-market rise isn’t going to go on indefinitely,” he says. “There’s going to be a correction, I don’t know how big, but it’ll happen in the next year or two, maybe six months.”

The fear of losses ramps up as investors age and have fewer years left to recoup from setbacks like those inflicted in the vicious bear market from late September 2007 to early March 2009, during which stocks fell by more than 50 percent. The math is merciless: Lose 20 percent on $10,000 and you must make 25 percent on the remaining $8,000, just to break even. Lose 50 percent and you need to make 100 percent. 

Amazingly, in about a year after hitting their nadir, stocks had indeed risen 100 percent. And they kept going. As of this writing, the S&P 500 index had more than tripled from its March 9, 2009 low.

Ironically, that dizzying climb seems to have scared some investors as much as the devastating plunge did. Those investors have convinced themselves that, like Icarus and Daedalus of Greek mythology, stocks are flying too close to the sun and are primed for a vertiginous tumble, and they’ve stayed out of the market. A recent Gallup poll found that only 52 percent of American adults have money in the stock market, directly or indirectly (as through a pension plan or mutual fund). In 2007, before the Great Recession and market slump, the figure was 65 percent.

Problem is, anyone falling prey to such fears blocks one path that can help allay the bigger worry about outliving their assets: patient investing. And, remember, today even a 70-year-old has time to be patient. We’ve likely reached a period where that virtue will be particularly important.

After years of being held down artificially at ultra-low levels to prop up the economies of the United States and other nations, interest rates are edging up, which is bad news for bonds and other fixed-income investments, whose prices fall as rates climb. At the same time, the stock-market bull looks tired.

If shares stall or fall and investment-grade bonds slump, some investors, accustomed to hefty returns, will be tempted to reach for profits by moving into riskier assets: speculative stocks, junk bonds and derivative securities (that they and their financial advisors don’t always understand). Big mistake, warns David Kotok, the chairman of Cumberland Advisors, an investment firm headquartered in Sarasota, and a frequent commentator on CNBC. “Expectations have been built to unsustainable levels by a decade of stimulus by central banks,” he warns. “I tell clients to now expect yearly returns in the low single digits—4 percent, 5 percent, 6 percent, maybe—not double digits. They don’t like to hear that. Some are willing to take on more risk. We recommend against that. It’s one thing to go into junk bonds and other high-yield credits in the financial environment we’ve been in for 10 years. It’s another when rates are starting to rise and stocks look very pricey. Everything reverts to the mean over time.”

Lauren Rudd, the 40-year Wall Street veteran whose clients include Dick Pell, is accustomed to dealing with another type of reaction when stocks stumble, even for a short period. “I’ve had people come in when the market goes down, people who actually have done well with stocks, and say: ‘Sell everything! I can’t take it anymore! I’m going back into CDs [bank certificates of deposit].’ I tell them: You have three choices: cash, fixed-income, or equities. With cash, inflation is going to eat at your purchasing power every year. With fixed income, interest rates are rising, so the price of bonds [which fall as rates climb] will come down, and you’re still not making any money because rates aren’t that high yet. So you’re down to the third choice: equities. If I were you, I’d stick to stocks.”

Gruffly entertaining, Rudd writes a syndicated financial column that has run in the Sarasota Herald-Tribune for two decades, and he appears weekly on local TV. Five years after its founding, his firm now oversees about $140 million in clients’ assets.

The money manager says his typical client is older than 70 and has about a $250,000 to $1 million portfolio. “That has to last them maybe 20 years,” he says. “We only invest in stocks—not bonds, mutual funds or exchange-traded funds—and only in companies that have been raising dividends for at least 10 years; the average is probably 22 or 23 years. We can do for them about 2 ½ percent in dividend yield alone. We do all our own research. We come down to a list of 60 companies and we invest in 40. Every client has the same portfolio, and the turnover is just two to four stocks a year.”

To select those stocks, Rudd analyzes their fundamentals and employs a variation of value investing. For him, that means betting on stocks trading at least 30 percent below what he views as their true worth, in the expectation that investors eventually will recognize this and bid their prices up. This approach has been out of vogue on Wall Street throughout much of the bull market, but he’s made it work. He contends that, over any stretch longer than two years, his dividend/growth strategy usually will outpace the S&P 500, which, with dividends reinvested, has returned about 10 percent annually since its inception in 1928.

“When I see that a client is nervous, I point out that the companies that meet our standards went through the Great Recession and generated enough revenue and earnings to keep paying dividends,” he says. “So you have a probability of 90 percent to 95 percent that you’ll keep getting dividends and that they’ll keep rising by 7 percent to 9 percent a year.”

Where does the nervousness come from? Rudd explains, “They’ll tell me: ‘Lauren, I’m looking at CNBC, and some guy said that the market’s going to crash.’ So, I say: ‘Fine, explain to me what a crash is. Do you mean a 1929 drop in the market?’ [In 1932, at the worst of the Great Crash, the Dow was 89 percent below its 1929 high.] That’s not too likely. I’m 72, and 2008 was the worst financial crisis of my lifetime, but it was no 1929.”

However, regardless of what logic, friends, advisers or financial history say, it’s always 1929 for some people. And that will make it harder for them to avoid outliving their assets.

Richard Rescigno, a Sarasota-based writer and former managing editor of Barron’s, has won a number of awards for his financial reporting for Sarasota Magazine.

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