Time is the single most important factor in life and in finance. The uncertainty surrounding time represents a challenging financial inefficiency.
Because people have an unknown death date, as they age, they tend to move their money into volatile investments with lower return potential: bonds and CDs. The average Baby Boomer today is 68 years old, with a lifespan expectation of somewhere between one second and 30+ years. This vast range of uncertainty is the reason financial planning software is heavily programmed on the side of caution, for both legal and compliance reasons. Using actuarial tables that calculate death dates based on just two factors: age and smoker/nonsmoker. They inevitably generate highly conservative spending recommendations that, at best, are educated suppositions.
Using a calendar to measure someone’s life expectancy will be antiquated in the future. The remarkable progress being made in aging research such as genome editing, brain implants and other technological advances hold the promise of people living longer, perhaps many decades longer. Assuming you believe in Moore’s Law and scientific advancement, the next decade or two should see the problems related to some diseases virtually eliminated.
Because time is the most important variable in all financial calculations, investment decisions will have to be viewed within the context of the amount of time in the equation. People’s investment horizons will necessarily be lengthened and, as their risk of running out of money increases, they will have to secure higher rates of return from their investment portfolio. If lifespans of 100 to 125 years become common, fixed income securities paying a few percentage points of interest will likely no longer meet the income requirements of these extended lifespans. Investors will be forced to secure higher returns and portfolio managers will face the hurdle of managing money in a changed financial environment. As life expectancies are extended, equities are apt to become exponentially more important in terms of how they impact the markets. Investors will need higher allocations of equities, creating an immense and continuous demand for equities and a bull market of historic proportions.
Personal financial planning will get much more personal and the probability of someone outliving their money should decrease substantially. People will be able to confidently spend their money when they have a better idea of when they are going to die.
Imagine a time, perhaps ten years from now, when senior citizens are no longer making financial decisions based on end life planning but rather planning for the second half of their life. They are unlikely to be thinking about buying bonds or other investments designed to provide retirement income because they will be decades away from retirement. Picture someone that has been a CPA or attorney for 40 years going back to school at age 75 to become a portrait artist or airline pilot. The amazement of Tom Brady playing quarterback at age 45 will become a meaningless statistic in the future as players will routinely compete into their 50s and maybe beyond.
Some of the likely candidates for changing careers will be those deposed by AI and other emerging technologies. As an example, most financial planners will not be needed in the future and GenAI will likely reduce the headcount by at least half. The only financial planning professionals that will be needed are those that do unique calculations like valuing a business, creating complicated executive compensation plans or have some very specific niche-planning expertise like special needs trust planning. In the future, humans will spot-audit AI-generated financial plans that AI flags as unusual.
For investment managers, these advances will mean having to stay informed and ahead of the curve. I believe it will be considerably easier for managers to identify the companies doomed to be swallowed up by innovation than to identify those destined to prosper from research breakthroughs.
Source: Baby boomer years: When this generation was born and age in 2024. (usatoday.com)
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