The Classic 60-40 market portfolio with 60% equity and 40% bonds has undergone severe scrutiny in recent years, and major changes in the bond market have led to fundamental questions about traditional approaches to long-term retirement income planning. But for investors who target financial security for age-appropriate financial security, this year’s stock market volatility has sent some to look at this concept again. That’s a mistake, says Ric Edelman, former head of Edelman Financial Engines.
Edelman says it wasn’t the bond market that killed the 60-40 portfolio. Rather, it is us humans. And market volatility this year should not send back investors running towards the concept as a long-term revision.
With life expectancy increasing and health and science breakthroughs expected to increase over the next few years, Edelman says the 60-40 portfolio probably won’t provide investors with enough money for a longer lifespan.
“I’m dying for longevity,” Edelman said this week’s “ETF Edge.”
“We live longer as a species than ever. No human being has lived this long anywhere in humanity,” Edelman told CNBC’s Bob Pisani. “I’ll run your financial planning model, assuming you live in 100,” he said. “You’ll run out of money.”
That all means investors planning a long-term need will need to invest more money into the stock market than ever before. Edelman said 70% to 80% of stocks are reasonable for many investors who don’t want to fall in the top position of savings.
“If you die at 80, that’s not a problem,” he said. “But you live to 90 or 100 or 110. That’s a problem.”
Financial Number in the Era of Super Aging
According to the World Health Organization, the number of Americans over the age of 65 is projected to reach 95 million by 2060. This is an older trend, which consists of almost 23% of the national population and has a major impact on financial security.
According to Fidelity Investments, the average 65-year-old retired couple in 2024 may save $315,000 (after tax) just to cover medical expenses after retirement. Federal Reserve data shows that among older Americans, the amount held in retirement accounts is too low for the overall costs associated with longer life expectancy.
From neuroscience to bioinformatics, 3D printing, robotics and AI, Edelman focuses most on the impact of people living at age 100 and not over 65, but over.
This view is not universal, and some studies suggest that, aside from major breakthroughs, the benefits of longevity in recent decades for US citizens.
But Edelman is bullish about the outlook for health technology and what it means for investors. “For the next 30 years, humans will live to over 100 on a daily basis,” he said.
Comet | istock | Getty Images
Alzheimer’s disease and the cost of living longer
The fight against Alzheimer’s is just one example. Edelman and his wife have been involved in the effort for decades, and they have acquired a diagnostics company that plans to immediately start a blood test that Alzheimer’s is your future and that can tell you 10 years before your symptoms with 90-95% accuracy, he says.
Edelman hopes to bring the test to the market “in the coming months,” adding that the company that discovered the test through research could be applied to other neurological diseases, such as Parkinson’s disease, and could also be cancerous.
That may be scary, but 10 years ago, Edelman said he didn’t want to know the results of this test because there was nothing you could do with knowledge – a lot of things have changed.
“I would have said ten years ago that I didn’t want to know,” he admitted, but he added that he now knows that basic lifestyle changes can help slow and reduce symptoms, from diet to stress, sleep and exercise. “Everything we say to you as we do for your heart applies to your brain,” he said. And even simple techniques like hearings can reduce stress on the brain and slow Alzheimer’s disease.
The cost of Alzheimer’s disease is large. On average, people diagnosed with Alzheimer’s disease and those diagnosed with death are on an average of 12 years from diagnosis to death, with care needed 24/7. “It will bankrupt millions of American families,” Edelman said.
Long-term income bond ladder
The bond market has the option to address the biggest issues related to longevity. It’s a fear of running out of money. It is called the Bond Ladder and was recently introduced in ETF format.
Edelman says Bondrader ETFs are a good option for the issue of increasing life expectancy, as they provide a guaranteed lifetime income. These ETFs buy the US Treasury Department and generate income from paying interest over a wide maturity schedule from ultra-short bonds up to about 30 years, and return capital to investors from bond ladders as individual bonds mature.
The LifeX2035 Term Income ETF (LDDR) and its complementary portfolio have timed over other years and are considered innovators who bring concepts to the ETF world.
“It’s an incredibly boring ETF. It’s buying our wealth. Period. The end of the story,” Edelman said.
However, he added that as an investor, he would need to purchase 120 Treasury debts from 30 to 10 to 10 years to create his own equivalent of this bond ladder. “What a nuisance!” Edelman said. “This ETF does that at 25 basis points.”
These ETFs also offer tax advantages to investors. For example, using a 10-year bond ladder ETF, investors receive $900 a month from an investment of $100,000, and about $400 only from taxable bond payments. “The rest isn’t,” Edelman said, referring to the capital returned to investors from the Treasury value, which is always on sale as ETFs mature.
“No matter how long you live, you’re earning a steady monthly income from the safest investments in the world,” he said, adding that investors should use these ETFs in their tax accounts considering the tax efficiency aspects of their strategy. “It’s an innovative idea, and I think it’s going to catch up,” Edelman added.
Ultimately, human longevity is a news situation that is plagued by good news for investors. Few people are against living longer, but it puts pressure on us all to live a better life. And Edelman believes it will be much older for many.
“By the time you turn 95, it’s really good for you to be healthier than you are today,” Edelman told Pisani.
Sign up for our weekly newsletter beyond the livestream and take a closer look at the trends and numbers that shape the ETF market.
Disclaimer
