Introducing the Longevity Portfolio

Journal of Financial Planning: March 2020

Executive Summary

• Outliving savings (i.e., longevity risk) is an important consideration when developing a financial plan for a retiree. Purchasing an annuity is widely regarded as the best approach to managing longevity risk; however, annuities remain relatively unpopular.
• Although a few mortality-linked investments exist, they are not widely utilized and will likely not be available, or attractive, for household portfolios for the foreseeable future.
• This paper introduces the concept of a “longevity portfolio,” which is an investment strategy designed specifically to manage the increased potential costs associated with unexpected improvements in mortality using traditional securities, such as publicly traded stocks.
• The ability of a longevity portfolio to hedge unexpected changes in mortality rates is unknown. However, certain sectors, industries, and companies would likely benefit more from unexpected mortality improvements than others; and are, therefore, attractive additions to a retirement portfolio due to their hedging potential.
• Longevity portfolios can increase portfolio efficiency, perhaps considerably, even if they cost more than non-liability focused investment strategies (e.g., a traditional market capitalization weighted index) depending on the expectations, preferences, and situation of the respective household (consistent with the potential value of other liability-driven investing approaches).

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