Longevity Risk

Longevity Risk

January 27, 2022

For much of human history, life—as described by 17th century political philosopher Thomas Hobbes in his book Leviathan—was for most people “nasty, brutish, and short” … whether they were in a state of war or not. Recent generations though—at least in most parts of the developed world—more readily expect to live long, active, and rewarding lives. As people increasingly live not just longer lives, but also more active and healthy lives, the more difficult task these days is to make sure that they also prosper commensurately… so that they do not prematurely exhaust their resources, jeopardize their standard of living, or prevent themselves from achieving other important lifetime goals like leaving personal legacies to family or philanthropy. Indeed, this developing phenomenon has given rise to a new kind of life-planning challenge in recent years called longevity risk.

Longevity risk is particularly troubling for pension funds and life insurance companies, where increasing life expectancy trends among pensioners and policy holders threaten to result in ultimate payout levels much higher than originally estimated. As a result, traditional defined-benefit pension plans and many types of annuities—which guarantee lifetime benefits for their policyholders and thus expose the providers to the greatest levels of longevity risk—are either becoming increasingly rare or more expensive. At the same time, individuals must confront the other side of the longevity risk equation. When coupled with inflation (or purchasing power) risk, longevity risk is typically the main reason why many investors—even those in retirement—may want to consider accepting other forms of more obvious and even more immediate risks like market risk or price volatility when designing and rebalancing their portfolios. 

The growing likelihood of being exposed to longevity risk is compounded by the unwelcome circumstance of very low current interest rates and correspondingly low yields on most traditionally desirable safe-haven fixed-income securities. Many fixed-rate investments now offer returns less than the anticipated average long-term rate of inflation, and thus carry the risk of delivering potential negative “real returns” over time. In recognition of this multi-generationally low-yield environment and the parallel need to combat the possibility of outliving one’s asset base, we believe that balanced asset allocation investment programs ought to be considered at all stages of life. Well diversified and balanced portfolios can mitigate not only volatility in the short run but also provide potential capital appreciation and maintenance of purchasing power over time.

Still, some people may simply demand greater assurance behind their planning—or what might be called “longevity insurance”. Buying guaranteed income streams from annuities is one possible way to accomplish this objective—even as a supplement to balanced portfolios. The conundrum is that annuity assets are typically invested in bonds to achieve these ultimate promises, and that means that their payments are disappointingly low right now because of the same low interest rate environment that perplexes regular fixed income investors. As a result, more money must be committed up front to purchase annuities to lock in sufficient or required income, and this raises the inherent cost and difficulty of using annuities; plus, the buyer gives up ownership of the purchase amount in return for the guaranteed income, and generally this trade-off is not desirable—hence our primary focus on balanced portfolios and total return objectives. Nonetheless, we continue to explore various ways to generate income in this era of low yields. In the meantime, we look forward to helping you celebrate a wonderful, rewarding, and long life, and constructing portfolios that have the staying power to allow you to accomplish your goals.

Articles and Commentary

Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.


Video Presentations

All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.

Recent Posts

Jun 24, 2022
CNBC Halftime Report: Analyzing the Fed Chair's Testimony | June 23, 2022
Sand Hill News
Sand Hill News
CNBC Halftime Report: Analyzing the Fed Chair’s Testimony | June 23, 2022

Watch Sand Hill's Chief Investment Officer, Brenda Vingiello, CFA join the CNBC Halftime Report to discuss the Federal Reserve's interest rate hike and its impact.

read more
Jun 10, 2022
CNBC Halftime Report: Strategies in a Volatile Market | June 10, 2022
Brenda Vingiello
Brenda Vingiello,  CFA
CNBC Halftime Report: Strategies in a Volatile Market | June 10, 2022

On June 10, 2022, Sand Hill’s Chief Investment Officer, Brenda Vingiello, CFA, joined the CNBC Halftime Report panel once again to discuss the ongoing market

read more
Jun 6, 2022
CNBC's Closing Bell: Overtime | "The Fed Needs to Talk Tough Right Now" | June 3, 2022
Sand Hill News
Sand Hill News
CNBC’s Closing Bell: Overtime | “The Fed Needs to Talk Tough Right Now” | June 3, 2022

Brenda Vingiello, CFA, joins the Closing Bell: Overtime investment panel to discuss the Fed balance sheet, rate hikes, and market volatility. Check out her commentary

read more

Stay up to date, receive email updates from Sand Hill directly to your inbox!