Portfolio Design: A Modern Approach to Asset Allocation

LONGEVITY

Many Americans don’t really understand how long their retirement may be. Life expectancy has increased steadily over the last 50 years at the same time that the age of retirement has fallen. According to the Labor Department, the median age of retirement for both men and women is about 62 years of age.3 That’s down from an average age between 66 and 67 in the 1950s. Americans at 62 can often look forward to 20 or even 30 more years of life in retirement. Yet few Americans have a coherent plan to make sure their resources will last that long. Savings are often inadequate and spending is often too high to be sustainable. Investment decisions, moreover, are often inconsistent with spending rates.

Some Americans are fortunate enough to have guaranteed pensions that provide them with a steady income throughout their retirements. These are the old-style defined benefit pensions that were once quite common in corporate America (and are still provided by many state and local governments). The pensions provide a guaranteed income to the employee and often to the employee’s spouse in the event of the death of the employee. Sometimes the income is indexed to inflation, rising with the cost of living during retirement. Today, the balance has shifted away from defined benefit pension plans to defined contribution pension plans, like the 401(k) plan, where workers contribute part of their salaries to the plan, with firms often matching or supplementing the employee contributions. According ...