The 100-Year-Old Portfolio: Investments for a Long Life

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By Joanne Cleaver

Living to 100 used to be an actuarial punchline. Plan like you'll live to 100, but expect that you'll fall, oh, a couple of decades short.

But for baby boomers heading into retirement in relatively good health and determined to stay that way, living to 100 is an increasingly likely possibility. Expecting to hit 100 changes everything about how you invest, withdraw money and much of how you determine your lifestyle.

"You think, I'll be old, active and I'll have money," says Jan Blakeley Holman, director of adviser education for Thornburg Investments, a money management firm in Santa Fe, New Mexico. "It changes the whole conversation. Instead of focusing on retirement, which is an event, you focus on your life and expect gradual transitions over several decades." Here are five tactics for planning for your three-digit birthday.

1. Don't Follow Your Parents' Retirement

The old notion was to stop working the day you turned 65 and coast quietly on a fixed income from a pension, Social Security and a few modest investments. The more likely reality is that you'll continue working in some fashion. A Pew Charitable Trusts March 2015 survey of 7,845 people, taken between Nov. 6 and Dec. 3 of last year, found that 53 percent of Americans expect to shift into a new type of work in retirement.

If you're working longer, you'll be paying income taxes longer, and that ripples through most assumptions about using tax-shielded retirement accounts. That means you have to rethink when and how to withdraw income, Holman says. If you are assuming you'll live to 100, you expect to enjoy the same amount of retirement fun in a somewhat longer "active retiree" phase, Holman adds. That demands more money, fueling the expectation for ongoing work.

"The idea that your tax rate will be lower and your income will be lower when you retire ... Well, a lot of people want to scale back work, but with the same level of income," she says. Many people expect to shift gears to a sustainable schedule of relatively high-paying, part-time work or self-employment, with maximum flexibility and generous time for travel and personal pursuits.

2. Test Key Components Now

Nelson, managing principal of Servo Wealth Management, based in Oklahoma City, says transition management is an emerging factor in retirement planning. If you think you'll become self-employed rather than have on hand six months' worth of living expenses recommended for the typical worker, maintain two or three years' worth of expenses to insulate your core assets from your entrepreneurial venture, he says.

A smart way to design this is with a short-term portfolio that you can sell first for quick cash. "Then, you can keep growth stocks in the long-term portfolio and ride out any temporary dips in the market," Nelson says. Later, when you transition to full retirement, shift seven years' worth of living expenses into the short-term portfolio, preserving a growth portfolio that will continue to build.

3. Create 2 Bucket Lists

If you think you'll live to 100, you have less urgency to accomplish any particular goal in any particular year, but you likely have more goals you'd like to achieve. Segment the goals into a daily quality-of-life bucket, which could include smaller budget items, such as minor home improvements and weekend trips, as well as a big-ticket bucket, like the blowout vacation, Nelson recommends. Scaled buckets let you keep achieving aspirations, regardless of current economic conditions.

4. Wait Until at Least 70 to Buy Annuities

Wait at least until age 70 to buy any type of annuity, for two reasons: first, to capture as much growth as possible from your stock portfolio, and second, to closely match the size of the annuity to your actual living expenses, says William Bernstein, an Eastford, Connecticut, investment advisor and author of "The Investor's Manifesto and Rational Expectations." "Deferred annuities are a good deal in theory, but not in practice," Bernstein says, because you trade steady income for likely growth. Put annuities in place as you need them, he advises.

5. Treat Your Portfolio Like an Endowment

That means applying "smoothing" rules that calibrate each year's combination of withdrawals and portfolio growth to ensure you are never eroding principal, Holman recommends. This is a complicated process that likely requires professional guidance, Holman says.

That's why the traditional advice of shifting retirement funds into safe but low-yielding bonds is a recipe for "going broke slowly," Nelson says. "Ask your advisor for a chart or projections. You want to see the cost of living intersecting with return and withdrawals. At what point will you run out of money, given your current lifestyle?" he says. "Create your own sustainability index. And remember that month-to-month results don't have a lot to do with your lifelong goals."

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