The Time Horizon Risk No One Talks AboutSubmitted by Silverlight Asset Management, LLC on February 20th, 2019
Ossie Dahl’s retirement didn’t go as planned.
The 64-year old hospital exec had just completed a 40-year career at White Plains hospital in New York.
Moments after finishing a speech at his retirement party, he collapsed and died.
Nobody knows how long they will be “retired.”
That indelible truth complicates financial planning. Time horizon is a key variable in the Retirement Equation. Yet it’s also highly uncertain.
Mr. Dahl certainly had no idea his retirement would last just a single week. Others may live a lot longer than they expect.
Broadly speaking, life expectancy is rising around the world. Per the Social Security Administration:
- Men turning 65 today can expect to live until the age of 84.3.
- Women turning 65 today can expect to live until age 86.7.
If you want to avoid running out of money, assume you’ll live longer than these estimates.
But while you do that, don’t ignore a less frequently highlighted risk on the other end of the spectrum. That is: how should someone hedge the possibility they won’t be around to enjoy a long retirement?
Here are some ideas on how to make the most of your money, while you’re still here.
Overweight experiences over things
Financial gains aren’t worth much unless they enhance your quality of life.
In the U.S., research shows that after people earn around $75,000 annual income, extra money has little impact on daily happiness.
Thus, if your primary life goal is to be happy, it may be wise to spend less time deliberating how to earn more money, and more time on how to spend it wisely.
Elizabeth Dun and Michael Norton are the authors of Happy Money: The Science of Happier Spending. According to them, we should overweight experiences over things in our discretionary budget. This is because “research shows that satisfaction with experiential purchases tends to increase with the passage of time, while satisfaction with material purchases tends to decrease.”
In other words, whereas the jolt of excitement we gain from purchasing a shiny new object quickly fades, the joy associated with positive experiences compounds. We get to relive special trips and events in our mind. And we tend to remember these experiences more fondly the longer time passes.
Another advantage of experiences, according to Dunn and Norton, involves an “apples-and-oranges” quality.
We are happy with things, until we find out there are better things available.
Luckily, this tendency may be limited to things. Even the simplest experiences, like eating a bag of SunChips, are relatively immune to the detrimental effects of attractive alternatives. Offered the chance to eat a bag of SunChips, students enjoyed the chips’ crunchy goodness regardless of whether the surrounding alternatives included Cadbury’s chocolate or clam juice.
We can apply this finding to our lives before and after retirement.
Thankfully, before he retired, Mr. Dahl appears to have enjoyed a life full of rich experiences.
According to family, he loved to attend Bruce Springsteen concerts and Yankee games.
He didn’t wait until retirement to start hobbies either. He played golf and was an avid gardener.
He also enjoyed food, frequently visiting New York City steakhouses.
And he didn’t wait for retirement to start traveling. Favorite spots included Pinehurst, North Carolina; Rome, Italy; and Napa Valley, California. One trip to California, with Uncle Ray, his family described as particularly “magical.”
We would all be wise to follow Mr. Dahl’s lead, using money as a vehicle to fund our own magic memories. Start today, because no one is promised tomorrow.
Gift early and often
There’s a German saying: “It is better to give with a warm hand than with a cold one.”
Dahl was a family man through and through. And by all accounts, he gave a lot of himself to the people he cared about. “Spoiling his eight nieces and nephews was another beloved past-time of Dahl’s,” one local media outlet wrote.
There are numerous benefits to giving while we are still alive.
One is the simple fulfillment derived from watching our gift light up someone’s life.
Also, we can exert more influence on how financial resources are allocated if we’re still around to supervise.
A story involving another New York hospital is apropos to drive this point home.
Donald and Mildred Othmer were very fortunate. They invested with Warren Buffett in 1961. By the time the couple died, their Berkshire Hathaway investment had mushroomed from $50,000 to $780 million.
In the 1990s, the couple left a large endowment to Long Island College Hospital, of which Mr. Othmer was a board member. Their intention was for the hospital to use only the interest that money produced, so it could remain open in perpetuity. However, a series of court actions permitted the hospital to dip into the principle. The assets were mismanaged and depleted, and the hospital eventually had to close.
There are also practical timing factors to consider related to an inheritance. For instance, if you live into your 80s or 90s, how much will your children benefit from an inheritance if they’re at a point in life when they’re starting to wind things down? A monetary gift may do a lot more for them a few decades earlier, when they’re knee-deep in the financial burdens associated with raising a family.
Gifting—either to family or charities—is always a personal decision. But giving with a warm hand can have significant utility—for both you and the recipient.
Of course, one other way to hedge the risk of a shorter than intended retirement is to retire early.
Tanja Hester and Mark Bunge did just that. Over a six-year span, they went from workaholics to both retiring around the age of 40. They chronicled their journey in a blog titled: Our Next Life.
The blog lays out an array of tips on how to pinch pennies and develop passive income streams.
Keys to making their plan work included:
- aggressively saving via their 401(k)s
- minimizing the cost drag on their investments
- automating budget allocations—which helps reduce impulse purchases
Wherever you happen to be in the wealth management lifecycle, the key to managing time horizon risk—on both ends—is maintaining a proper balance.
In your portfolio, it’s about balancing risk and return.
In your life, it’s about balancing an even more precious asset than your money—your time.
Also published by RealClearMarkets. Reprinted with permission.
This material is not intended to be relied upon as a forecast, research or investment advice. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by Silverlight Asset Management LLC to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Silverlight Asset Management LLC, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.