How the longevity boom is disrupting retirement and Warren Buffett’s businesses
During Berkshire Hathaway’s (BRK-A, BRK-B) annual shareholder meeting, chairman and CEO Warren Buffett told the crowd about the time he went to visit Arjay Miller, former president of Ford Motor Company, for his 100th birthday.
Miller told him there were 10,000 men and 45,000 women in the US who were at least 100 years old. (Indeed, those numbers were roughly correct as of the 2000 US Census.)
“So if you really want to improve your longevity prospects … you have a sex change. You’re four and a half times more likely to get to be 100,” Buffett laughed and shared with the crowd.
Jokes aside, the worldwide population is entering into uncharted territory as people live longer and healthier lives. Longevity is humanity’s new frontier. Although it's considered a blessing by many, a few concerns come along with adding years to one’s life: It can put pressure on certain industries, strain economic growth and raises questions about retirement savings.
A report by the World Health Organization said life expectancy worldwide has increased by about five years in the last 15 years — the fastest gain since the 1960s. And according to a research note out Tuesday by Bank of America Merrill Lynch (BAML), “We’re not prepared for the coming tidal wave.”
BAML’s study indicates that age-related spending makes up 40% of government budgets in developed markets, and rising age-related costs are likely to push 60% of sovereigns into speculative grade. In other words, longevity has the potential to have a catastrophic effect on countries worldwide.
The business implications that stem from an aging population affect Buffett's company, Berkshire Hathaway. Berkshire owns primary insurers like Geico and reinsurers including Gen Re. During the company’s annual shareholder meeting, Buffett was asked about Geico’s growth and profitability.
He responded, “Now, the first quarter is by far the best quarter for growth. But last year both frequency, how often people had accidents, and severity, which is the cost per accident, in other words just how much those accidents cost you — both of those went up quite suddenly and substantially."
According to the National Safety Council (NSC), the number of traffic deaths in the US rose 8% from 2014 to 2015, the largest year-over-year percentage increase in a half-century. The NSC said the rise in fatalities reflected lower gas prices and an increase in cumulative vehicle mileage — meaning more people were on the road. And, as the CDC has noted, the odds of being injured in a car accident increase as one ages.
The insurance sector isn’t the only area that’s affected by people living longer and more active lives. The ways in which people plan and save for retirement has a significant impact on the financial sector. Baby boomers are turning 70 at the rate of 10,000 a day, and as it stands now, 42% of the entire federal budget is spent on Medicare and Social Security.
A recent report from the Wells Fargo Investment Institute, “Living Longer, Living Better,” highlights how longevity has significant implications for the future of benefits programs and why it may require rethinking investment strategies to help reduce the risk of outliving assets.
So how would Buffett invest for the future? He employs a 90-10 rule. In a letter to shareholders in 2014, Buffett laid out his advice, and it's very straightforward.
“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”
Click here to view a full replay of the 2016 Berkshire Hathaway annual shareholder meeting, which Yahoo Finance live-streamed exclusively. At this page you can also find our extensive coverage of the event.
