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Kocken notes that the highly individualized way we now prepare for retirement in North America and much of Europe is perfectly adequate for the accumulation stage. Whether through an advisor or an employer-sponsored defined contribution pension plan, individuals can accumulate and invest assets easily and while investment has its challenges, the core decisions of the accumulation stage are relatively straightforward.
It’s the decumulation stage where Kocken sees fewer solutions. Annuities, he says, can help manage that longevity risk, but today’s interest rate environment has made them less popular. He highlights the Longevity Pension Fund by Purpose Investments as another novel solution which can help individuals share that longevity risk. On a global scale, however, he notes that these solutions ‘barely exist.’
As financial advisors work to manage their clients’ longevity risk, he says they can always bring in the client’s core asset – their own human capital. By introducing the idea of some income-generating work later in life, an advisor can go a long way to securing their client’s financial assets and wellbeing through a longer period. In addition to the income earned in work, Kocken notes that through work many of us have key social interactions which can help stave off issues like dementia. Work can also be good for physical health in the long-term.
As they do that, advisors may have to run up against some of the industry’s own marketing. The promise of ‘freedom 55’ might not align with the management of longevity risk and the idea that working longer can actually be healthier. However, plans that open up a range of possibilities, from retiring at the earliest date possible, to staying in a job, to making a career change, can all help inform a decision that best manages that longevity risk.
For all the ways advisors can help their clients manage longevity risk, Kocken agrees that there needs to be a greater emphasis on collective solutions. Longevity risk is best managed when it is shared, and finding a route to that could go a long way to helping clients.
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