The Longevity Risk Conundrum:

Navigating the Paradox of Risk Aversion in Retirement Planning

As the clock ticks towards retirement, an ominous shadow looms over the golden years of countless individuals: the risk of outliving their savings. This longevity risk, amplified by the breakneck speed of technological advancement, is a growing concern for anyone facing the prospect of retirement.

The exponential growth of technology hints at a fat tail in the longevity risk distribution - a deviation from the norm and a higher chance of extreme outcomes. Futurists like Ray Kurzweil even predict that life expectancy may soon soar to indefinite levels.

Additionally, retirees can no longer rely on the state safety net for their financial security in old age. The ballooning number of retirees relative to the working population is putting a strain on government finances that is only likely to worsen. This has led to many individuals being increasingly unwilling to rely on the state safety net and instead taking matters into their own hands to ensure their financial stability in retirement.

This problem is especially pressing for those in their 50s or 60s, who may have limited time to recover from potential losses and must prioritize preserving their savings over maximizing returns. Thus, they may flock to conservative investments that promise stability over growth.

Current advice to counter this is a well-worn trope: diversify your investments and trust in Equities for the long-term. In fact, research from Andre Schleifer suggests that financial advisors add value by prodding individuals to invest in the stock market, as they would otherwise be too risk-averse and keep their money in cash, missing out on long-term returns. But this hardly looks like a sufficent incentive, especially post recent stock market girations.

The search for a solution has led to the exploration of innovative approaches such as longevity risk sharing and time diversification. Longevity risk sharing involves pooling together a group of individuals to spread out the risk of living longer than expected. By sharing the risk, individuals can potentially lower the cost of insuring against the longevity risk and reduce the burden of outliving their savings.

Time diversification emphasizes the importance of dynamic asset allocation and keeping risk at a target level to increase compound returns. Unlike the conventional approach of cross-sectional diversification, which focuses on making different investments all at the same time, time diversification advocates for taking similar scaled risks for each time period. This helps to diversify the risk from any one, particularly bad period and avoids the loss of most of the money in a catastrophic period. Listen to this discussion between Myron Scholes, Victor Haghani and Larry Bernstein.

While these solutions may not be perfect, they present a promising direction in tackling the longevity risk conundrum. The challenge now is to educate individuals and make these solutions accessible and appealing. Retirement planning in the age of longevity requires rethinking traditional approaches and embracing new ideas. It's time to face the paradox head-on and find a way to secure the golden years.

This is Modern Tontines and Target Date Fund Ladders, the start of a campaign to make Modern Tontines and Target Date Fund Ladders a reality. Modern Tontines don't exist yet despite them being a realistic solution [partial solution] to the looming retirement crisis. Target Date Fund funds exist, but not enough of them to make an effective ladder. They'll need a collective effort on all our parts to make them a reality.