Longevity and Risk Profiling

Extending the Investment Horizon

Traditional financial advice often centers around preparing for retirement, typically around the age of 65. However, this perspective is outdated. The reality is that many individuals will live 20, 30, or even more years beyond this point. Therefore, the investment horizon should extend well beyond retirement, taking into account the need to support oneself through these additional decades.

The Wealth Span

The concept of a "wealth span" is crucial. It emphasizes that our financial planning should not only match our lifespan but should ideally exceed it. This approach ensures that individuals can maintain their standard of living, cover healthcare costs, and manage unforeseen expenses throughout their retirement.

Wealth Span = Lifespan not only Health Span

Planning for a wealth span involves:

1. Health-Dependent Continuous Investment: The strategy for continuous investment must be adjusted based on an individual's health status. For those in good health with a longer life expectancy, maintaining a diversified portfolio that includes growth assets can help combat inflation and ensure the retirement fund does not deplete too quickly. Conversely, individuals with poorer health and a shorter expected lifespan should transition to more conservative investments to preserve capital and ensure sufficient funds for their remaining years. Additionally, it’s important to consider the need for liquidity in investments, especially for those who might require 24/7 home care or other intensive healthcare services. Liquid assets ensure that money can be accessed quickly to cover these significant expenses.
2. Income Generation Beyond Pension Age: In the Swiss market, traditional pension schemes like the 2nd pillar (occupational pension) and the 3rd pillar (private pension) typically provide income up to the retirement age. Post-retirement income generation should focus on other sources such as dividend-paying Swiss stocks, real estate investments, and high-quality bonds. These investments can provide regular income streams beyond the pension age to support daily living expenses. As I have elaborated on the idea of a 5th pillar.

Factors Influencing Investment Horizon

Several factors significantly influence the investment horizon- these are some the traditional factors:

1. Financial Goals: The specific financial objectives an individual aims to achieve greatly impact the investment horizon. Short-term goals like buying a car or going on a vacation require a different investment strategy compared to long-term goals such as saving for retirement or a child's education.
2. Risk Tolerance: An individual's comfort level with risk plays a crucial role in determining the investment horizon. Higher risk tolerance may lead to longer investment horizons to capitalize on potential market growth, while lower risk tolerance may result in shorter horizons and more conservative investments.
3. Income and Savings: The level of income and amount of savings an individual has can affect the investment horizon. Higher income and substantial savings can allow for a longer investment horizon, as the individual can afford to wait for higher returns over time.
4. Market Conditions and Economic Outlook: Prevailing market conditions and the broader economic outlook can influence the investment horizon. Stable conditions encourage longer-term investments, while volatile conditions might prompt shorter horizons.
5. Life Events and Milestones: Significant life events such as marriage, the birth of a child, or buying a home can impact the investment horizon. These events often require re-evaluating and adjusting investment strategies to align with new financial responsibilities and goals.
6. Legal and Regulatory Environment: Changes in laws and regulations, particularly those related to taxes and retirement savings, can influence investment horizons. Understanding and adapting to these changes is essential for effective long-term planning.
7. Age: Chronical age as indicator for the investment horizon and with this the risk tolerance.

Biological Age vs. Chronological Age

Traditional investment advice often relies on chronological age to determine risk tolerance and investment strategies. However, this method can be overly simplistic and may not reflect an individual's true financial needs or capacity. Considering biological age—an assessment of how well or poorly your body is functioning relative to your actual calendar age—can provide a more accurate basis for investment decisions.

1. Health Status and Risk Tolerance: Individuals of the same chronological age can have vastly different health statuses and life expectancies. A healthier person may be able to take on more investment risk, benefiting from potentially higher returns over a longer period. Conversely, someone with significant health issues might prefer a more conservative approach to protect their assets.
2. Customized Strategies: By factoring in biological age, financial advisors could create more personalized investment strategies. This approach involves regular health assessments and adjusting the investment mix to align with the individual's changing health and life circumstances.

Practical Steps for a Lifelong Investment Strategy

1. Early Planning and Continuous Review: Start investing early and review your portfolio regularly. Adjustments should be made not just based on age, but on changes in health, financial goals, and market conditions.
2. Diversification and Flexibility: Maintain a diversified portfolio throughout life. Even in retirement, include a mix of growth and income-generating assets to balance potential returns and risks. In Switzerland, this might include a combination of Swiss equities, global equities, Swiss bonds, and real estate.
3. Utilize Swiss Pension Schemes: Make the most of the Swiss pension system. Contribute to both the 2nd pillar (occupational pension) and the 3rd pillar (private pension) to maximize retirement savings and take advantage of tax benefits. Additional contributions to the 2nd pillar are a further way for pension planning and tax benefit. Note that these will provide income only up to the pension age. If possible set aside additional savings/investments.
4. Emergency Funds and Insurance: Always keep an emergency fund to cover unexpected expenses and consider long-term care insurance to mitigate healthcare costs in later years.
5. Post-Retirement Income Sources: Focus on investments that can generate income beyond the pension age. This includes dividend-paying stocks, Swiss real estate, and high-quality bonds, which can provide a steady income stream to cover living expenses.
6. Seek Professional Advice: Work with financial advisors who understand the importance of both chronological and biological age. They can help craft a strategy that evolves with your personal circumstances and goals.

Conclusion

Investment strategies must evolve to encompass the entire lifespan, including the post-retirement years, to ensure financial stability throughout one’s life. Additionally, shifting the focus from chronological to biological age can provide a more nuanced and effective approach to investment planning, accommodating the diverse health statuses of individuals. This dual approach ensures that investment strategies are both comprehensive and tailored to individual needs, promoting better financial outcomes in retirement and beyond.