Feb. 10, 2012, 5:46 p.m. EST

By Charles Passy

If actuaries were the sorts of people to tell bar jokes, this might be one of them. But in truth, the 78-year-old woman happens to be flesh and blood. (We’ll call her Martha.) And equally real, for that matter, is her $20 million, newly minted life insurance policy — which was approved in late 2010 by The Hartford.

On first blush, such a business decision may seem to be merely a bold poker play — the insurance equivalent of going for an inside flush. (A $20 million policy, after all, is a big deal; the average face amount for a Hartford policy, by comparison, is a mere $500,000.) But look a little deeper and you’ll see something at work beyond risk-taking; you’ll see a revolution in the making, experts say. Ever so quietly, insurance-industry number crunchers are tossing aside the old statistical models and life tables. They’re recasting tired stereotypes about the “fatal” diseases of yesteryear. They’re rethinking that most ancient of questions: How long will we live? And they’re coming up with what many would say is a radical answer.

Call it the new death calculus: the 21st-century equation for determining human longevity. Or call it misguided guesswork, as some critics have. Either way, it’s hard to imagine a math problem that has flummoxed humanity for longer. (Actuaries, in fact, have been fumbling for an answer since 1583, when the first life insurance policy was issued.) And it’s even harder to conceive of one with more at stake in the outcome.

The dollar figure affected is so staggeringly enormous that it takes a while just to write out all the zeros. Start with $1.6 trillion, which is the amount currently invested in life insurance annuities — products typically tied to the longevity of the owner. Add another $6.5 trillion. That’s the amount in private and government pension plans, according to the Investment Company Institute. (Were the average U.S. life span to increase by just one year over current government projections, the country’s private pension systems — already struggling to keep pace after the recent market upheavals — would take a roughly $115 billion hit, based on data from Swiss Re, a prominent reinsurance firm, and ICI.) Now throw in another $4.3 trillion (what Americans have in 401(k)s and other defined-contribution plans), plus $4.6 trillion (what we’ve saved in IRAs), plus $10.5 trillion (the face value of individual life insurance policies in force in the U.S.) and you begin to get a sense of the ante. Leaving aside the matter of Social Security — a 14-digit-dollar question of its own — the pool of money tied to the death calculus is somewhere on the order of $27 trillion.

But don’t let the astronomical scale fool you. This particular bit of math is not merely a challenge for big governments and big business to solve. It’s one doozy of a personal challenge as well. As the expectations of human longevity morph and shift, so of course should people’s retirement plans — and with them, perhaps, answers to everything from the big-picture decisions (How much must you sock away for later years?) to the nitty-gritty (Can you afford to maintain two homes? Does it make sense to kick in for your granddaughter’s wedding?). After all, to prepare for four additional years of life span over current projections, someone who’s 50 years old now would need close to $160,000 beyond his or her current retirement savings to maintain a modest lifestyle, experts say. And increasing a nest egg by that much, assuming historical rates of return and inflation, could mean squirreling away an additional $2,500 a year. Scary, you say? Well, factor in the current jitteriness of the stock market and the millions of baby boomers fast approaching retirement and the solution to the death calculus is arguably more pressing than ever.

As for Americans whose retirement strategies won’t be affected, Stephen C. Goss, chief actuary of the Social Security Administration, can think of only one off the top of his head: “Bill Gates,” he says. For the rest of us, though, the answer matters deeply. Which is why a growing number of academic soothsayers — from actuaries and other mathematical modelers to biodemographers, medical sociologists and futurologists — are hard at work trying to solve the $27 trillion question.

To understand the latest thinking at The Hartford on this question, one has to travel a thousand miles from the company’s suburban Minneapolis headquarters to the rolling hills of Asheville, N.C. In the early-morning hours, if you loiter on the right mountain trail, you’re likely to see a sprightly, white-haired streak of a man jogging by. Dr. Robert Pokorski sets his alarm for 5 a.m. each day — but the alarm never goes off. “I’m always up by then,” he says, reading medical and other journals before he heads off for a run. It is this man, a 59-year-old physician-philosopher, M.B.A. and practicing Buddhist — working from a home office deep in the Carolina woods — who is steadily transforming The Hartford’s underwriting manual.

That tome, which provides guidance on virtually every new blood test, diagnosis and medication — essentially defining each variable in the insurance company’s death calculus — is now more than 2,000 pages long, having quadrupled in size over the past three decades. Pokorski, who was named chief medical strategist for the company’s life insurance division in 2010, is hardly responsible for all of those changes, but his impact on the manual at large has been enormous, says Brian Murphy, an executive vice president at the company. Summoning research and data from throughout the medical literature, Pokorski, along with other physicians, made the case that heart disease and several forms of cancer are no longer the “death markers” they once were. As recently as 1995, for instance, a man with advanced coronary disease was flatly uninsurable. Now it’s expected that an arterial blockage can be repaired relatively simply and new plaque buildups can often be controlled with medication, so that life expectancy is only modestly affected.

The changes, in The Hartford’s case, have been immediate — with hundreds of formerly uninsurable applicants now getting coverage (or better classes of coverage) each year. But the driver here has not been altruism so much as it has been a financial hip replacement of sorts for the firm. The Hartford, which two decades ago was the No. 6 life insurance company by revenues, is now ranked at No. 17. Its share price, meanwhile, has plummeted a jaw-dropping 78 percent over the past four years, compared with the 40 percent fall for the Life and Health Insurance benchmark index. The economy has been brutal on the company. But The Hartford’s new death calculus, in an odd way, is likely to give it a slight edge on the competition, Pokorski believes. “I think we take risks some large companies may have overlooked,” he says. The sales numbers, in fact, back that up in part. The Hartford increased year-over-year sales by 15 percent in the first half of 2011, compared with an industry average of 4 percent.

Rivals aren’t exactly giving ground. MassMutual, the No. 5 life insurer, boasts that it, too, takes a very progressive approach when it comes to evaluating, say, breast cancer survivors. “I would say we’re on the leading edge,” says Melissa Millan, a senior vice president with the insurer. Representatives for top-ranked MetLife and Prudential also say their underwriting manuals are changing by the month, as medical marvels reinvent treatment paradigms. They say they have an eye to the future as well.

Pokorski, for his part, grins widely, his wireless eyeglass lenses popping up on his cheekbones. He says cheerfully that one doesn’t need to look to the future for guidance as much as to the past. Average life expectancy has risen from 47.3 years in 1900 to 78.3 today. While much of that early — and most dramatic — gain came from lowering infant and childhood deaths, the experience in more recent decades is particularly telling, Pokorski says, pointing to reduced mortality rates at older ages. Since 1940, American men have gained about a year of life expectancy — and American women, 1.1 years — with every five-year period. If we merely hold to the same pattern, he says, average life expectancy at birth by the end of this century will be close to the century mark. Just count the number of centenarians. There are now about 53,000 Americans who are age 100 or older, compared with just 2,300 in 1950 — a 2,200 percent increase. The general population, meanwhile, has merely doubled in that span of time.

The idea that humankind is on the threshold of the most meaningful bull run-up of them all — the longevity rally — may be an exciting prospect. But tell it to researcher S. Jay Olshansky and he is sure to laugh in your face. (In a nice way.) Olshansky, 57, who teaches at the University of Illinois at Chicago, is the sort who posts videos online of his nonagenarian father dancing and telling bawdy jokes. And the most outrageous joke Olshansky (the younger) can think of, it seems, is that human life spans are heading for Methuselah territory.

By Steve Vernon

(MoneyWatch)  

Americans aged 62 and older had accumulated $3.19 trillion in home equity by the end of the third quarter of 2011, according to data recently released by the National Reverse Mortgage Lenders Association (NRMLA). During the same quarter, home equity increased by $46 billion, reflecting stabilization and improvement in home prices. The $3.19 trillion is the net result of a $4.2 trillion increase in aggregate senior housing values and a mortgage debt of $1.02 trillion.

This is good news for us older folks, as home equity often represents seniors’ largest financial asset, frequently surpassing the value of 401(k), IRA and retirement savings combined. As a result, one of the most important issues facing aging boomers will be if — and how — to use their home equity to help secure their retirement.

Reverse mortgages are one way to use your home equity in retirement. You can borrow against the equity in your home without having to make monthly payments as required when you have a traditional mortgage or home equity loan. Under a reverse mortgage, funds are advanced to you, and interest accrues on this balance. The outstanding balance isn’t repaid until you leave the home, sell it or pass away. You can take loan proceeds as a lump sum at loan origination, establish a line of credit or request fixed monthly payments for as long as you continue to live in your home.

According to the NRMLA, 99 percent of the reverse mortgages offered in America are home equity conversion mortgages (HECM) that are insured by the U.S. Department of Housing and Urban Development (HUD). To date, more than 725,000 senior households have utilized an HECM.

Possible uses of a reverse mortgage include:

– To pay for high medical or long-term care bills
– To pay for needed repairs on your home
– To provide a monthly payment to supplement your retirement income
– To buy a new home

As with conventional mortgages, you can get a reverse mortgage with a fixed or variable interest rate. Bear in mind: No matter what type of reverse mortgage you get, interest rates are generally higher than conventional mortgage rates. For example, one proprietary calculator shows a fixed reverse mortgage rate with an annual percentage rate (APR) of 5.95 percent, while conventional 30-year fixed mortgages are in the 4 percent territory right now.

Here’s one example of how a reverse mortgage might work, according to an online calculator offered by the NRMLA. A 70-year-old couple with a paid-for home worth $300,000 could get a monthly payment of $986 for as long as they live in the home or a single sum payment of $172,564. The calculator shows a variable interest rate of 4.11 percent; at that rate, the outstanding loan balance would grow to $211,037 in five years and $258,086 in 10 years. These amounts would be repaid to the bank if the house were to be sold or the owners pass away.

The monthly income shown by this example would certainly help supplement Social Security and other retirement income, but most likely it won’t compensate for not having any other retirement savings. I’d not count on using a reverse mortgage as an excuse not to save as much as possible for your retirement years. 

Before you snap up a reverse mortgage to secure your retirement, learn all you can about its terms and conditions. HUD, the NRMLA and the Federal Trade Commission (FTC) all offer excellent educational websites on the topic. In particular, make sure you understand the important conditions, such as upfront fees and insurance premiums, which can range from two to five percent or more of your loan amount.

You should also consider other ways to use your home equity to secure your retirement, including:

– Renting your house and using the monthly income to cover rent on a smaller, cheaper place,

–  Selling your house and investing the proceeds, or

– Taking on a roommate by renting a room or two to realize some income. 

If you aren’t purchasing long-term care insurance, then I’d seriously consider holding your home equity in reserve for the day when you might incur high bills for long-term care. At that time, you can take out a reverse mortgage or home equity loan. If you don’t ever need long-term care, then the home equity will provide a legacy to your children.

Your home equity: How to use it for retirement security
Planning your retirement: 9 ways to reduce your housing costs 

As always, take the time to investigate all of your options. You’ll sleep better at night, knowing that you’re making informed decisions.

By TOM LAURICELLA

The Seattle Times

Originally published Wednesday, December 28, 2011 at 10:57 PM

With a reverse mortgage, a homeowner receives a lump sum or regular payments based on the equity of his or her home, usually to help fund…

DEC 21, 2011, 1:11 PM

By Alicia Munnell

By Steve Vernon

 (istockphoto mammamaart)

The number of labor force participants over age 65 has increased about 22 percent in the past three years.

Irene Olsen works in Milford, Conn. Olsen 95 works 20 hours a week at the Milford Senior Center to pay for rising taxes and utilities. (AP Photo/Douglas Healey)

Many individuals who thought they would be able to retire when they reached age 65 are reconsidering because of the economic downturn and a sudden realization that they haven’t saved enough to live comfortably in retirement.

Retirement used to be an age-driven event, but now people are thinking about it from the perspective of, “Can I afford to retire,” said Joe Ready, director ofWells Fargo Institutional Retirement and Trust. In a recent survey of middle class people, those who make less than $100,000 a year, 25 percent of respondents said they would have to work until age 80 to be able to afford retirement.

“We always knew that three out of four people would work in retirement, but working until age 80 is very much a sea change,” Ready said.

The reality is that the majority of people don’t think very much about what they are saving for retirement and whether it will be enough to retire. Some of that is age specific. People nearing retirement age are very concerned with whether or not they will be able to retire, but more than half of respondents between the ages of 60 and 75 said they plan to fully retire, according to the “Retirement Fitness Mass Market Report,” which was conducted by Harris Interactive on behalf of Wells Fargo.

At least half of Americans in their 40s and 50s said they view working during retirement as a financial necessity. Twenty-five percent of individuals surveyed said they view work as something they will have to do until they are at least 80 because they do not have enough retirement savings to live comfortably in retirement, the report found.

“I don’t think we’ve thought of the implications for that. Think of it from a corporate environment perspective. What does that mean for companies with an aging workforce and what does that mean for a younger workforce?” asked Ready. “Think of these individuals. Will they physically or mentally have the capacity to work to that age? There are some pretty big societal issues and corporate issues people haven’t begun to think about.”

An AARP survey in 2008 had similar results, with 70 percent of mature workers saying they plan to work into their retirement years. Twenty-seven percent of those said they needed to keep working because of money, while 21 percent said they enjoyed working and wanted to keep their jobs.

“Our study confirms that many mature workers are ready to work in some capacity in what used to be called the retirement years,” said Deborah Russell, AARP’s director of workforce issues, in announcing the results of the study. “Forward-looking companies that want to address the looming ‘brain drain’ by tapping the pool of experienced workers need to offer creative programs and policies to appeal to that group.”

In its “Work and Career Study” report, AARP found that an aging workforce means American businesses are running out of time to prevent labor shortages, talent wars and knowledge loss. For the 10-year period ending in 2016, the study cites federal government projections that the age 55-plus workforce will grow five times faster than the overall labor force. This survey interviewed 1,500 workers between the ages of 45 and 74.

When asked how much they would need to retire, the median response was $350,000, according to the Wells Fargo survey.

“That’s good from a practical standpoint, but the bad news is they haven’t saved much toward it,” Ready said. The median amount saved for retirement, of those surveyed, was $25,000.

The survey also showed a disconnect between what people wanted for their retirement and what they were doing to achieve it. Most people surveyed said they expect to live 21 years in retirement. Since most people are living until their mid-80s, that is pretty close to reality, he said. But when they were asked how much they expected to withdraw from their retirement savings annually, 56 percent said they would withdraw an amount greater than 6 percent.

“That doesn’t work in terms of their 21-year time horizon. The numbers don’t add up between what they will have in retirement and what they will save. They are significantly overestimating that their withdrawal estimate will last for 21 years,” he said.

The Wells Fargo survey asked whether different age groups would be willing to allow cuts to their Social Security benefits. Of those aged 25 to 49, 49 percent said they would be willing to take benefit cuts. Only 28 percent of those aged 50 to 59 said they would be willing to accept a cut, and 19 percent of those aged 60 to 65 said they would allow a cut.

Most Americans over age 50 consider Social Security a large part of their retirement income. “Younger workers may feel they have more runway to save, which ties into how they feel about 401(k)s,” Ready said. “Middle class Americans do value their 401(k) benefit.”

Without pensions or a guarantee of Social Security benefits, most people under age 50 use their 401(k) as their main retirement vehicle.

The AARP Public Policy Institute released an alert this week looking at employment numbers for older workers. What it found is that the unemployment rate for people over age 55 dropped from 7 percent in October to 6.4 percent in November. That number is double what it was at the start of the Great Recession in December 2007, the report said. That means 2 million people over age 55 were unemployed in November.

It isn’t easy for older workers to reenter the workforce. Once unemployed, older workers are usually out of work longer than their younger counterparts, the report found.

“Despite continuing high unemployment rates, millions of older Americans have succeeded in remaining employed, and the number with jobs has increased in most months since the start of the recession. Since December 2007, the employed population aged 55 and over has increased by about 3 million, or by 11.5 percent, but employment remains below what it was for the other age groups,” the report said.

The labor force participation rate of people over age 65 has increased dramatically in recent years. In 2010, 17.4 percent of people over age 65 were in the labor force, compared to 10.8 percent in 1985, according to the AARP Public Policy Institute. The number of labor force participants over age 65 has increased about 22 percent, or 1.3 million workers and job seekers, since December 2007.  As of November 2011, 7.3 million members of the labor force were at least 65 years old.

People often ask how much they have to save for a secure retirement.  The answer depends on a number of factors.

• Earnings level.  The lower the earnings, the greater the portion provided by Social Security and the lower the individual’s required saving rate.
• Rate of return.  The higher the rate of return on assets, the lower the required saving rate.
• Age when saving begins.  The earlier the individual starts saving, the lower the required rate for any given retirement age.
• Age of retirement.  The later the individual retires, the lower the required rate.

A simple model shows that starting early and working longer are far more effective levers for gaining a secure retirement than earning a higher return. The model takes an 80% replacement rate as the goal, assumes Social Security benefits remain as promised under current law, and assumes people draw down 4% of their wealth each year.  It then calculates the required saving rates for individuals at different earnings levels, at different starting and ending ages, and at different rates of return.

The required saving rates for the medium earner, assuming a rate of return of 4% are presented in Table 1.  Two messages stand out.  First, starting to save at age 25, rather than age 45, cuts the required saving rate by about two thirds.  Second, delaying retirement from age 62 to age 70 also reduces the required saving rate by about two thirds.  As a result, the individual who starts at 25 and retires at 70 needs to save only 7% of earnings, roughly one tenth of the rate required of an individual who starts at 45 and retires at 62 – an impossible 65%.  But note that even that individual who starts at 45 has a plausible 18% required saving rate if he postpones retirement to age 70.

Table 1. Saving Rate Required for a Medium Earner to Attain an 80-Percent Replacement Rate with a 4-Percent Rate of Return

Source: Author’s estimates.

Retiring later is an extremely powerful lever for several reasons.  First, because Social Security monthly benefits are actuarially adjusted, they are over 75% higher at age 70 than age 62.  Second, by postponing retirement people have additional years to contribute to their 401(k) and allow their balances to grow.   Finally, a later retirement age means that people have fewer years to support themselves on their accumulated retirement assets.

Table 2 shows the impact of lower and higher rates of return for individuals who start at age 35.  The 2% return is slightly less than the inflation-adjusted long-run rate of return on intermediate-term government bonds and the 6-percent return is slightly less than the inflation-adjusted long-run rate of return on large cap stocks.  While higher returns require smaller contribution rates, they also come with increased risk.  Even ignoring risk, the required saving differentials are less than those associated with dates for starting to save and the age of retirement. In fact, an individual can offset the impact of a 2% return instead of a 6% return by retiring at 67 instead of 62.

Table 2. Saving Rate Required for a Medium Earner to Attain an 80% Replacement Rate with a Starting Age of 35, by Rate of Return

Source: Authors’ estimates.

The story for low earners and maximum earners is essentially the same.  The required savings rates  differ primarily because of Social Security.  Under current law, at age 67 Social Security will replace 55% of pre-retirement earnings for low earners and 27% of those earning Social Security’s taxable maximum.

It would be easy to assume a different target replacement rate or different levels of Social Security replacement.  Such changes are unlikely, however, to alter the basic message: starting early and working longer are far more effective levers for gaining a secure retirement than earning a higher return.

The Washington Post-REAL ESTATE

By Benny L. Kass, Published: November 3