Keeping up with long life
As people live longer and longer, so their approach to life and retirement savings needs to be reconsidered to take into account the new reality.
PSG head of strategic research and support Ronald King says one of the core issues facing both the retirement industry and people accumulating wealth for their retirement is longevity, the simple fact that people are living longer and now require more money to carry them through their post-retirement lives.
“Longevity is a major trend that is set to shift our thinking about lifestyle choices, long-term savings, social welfare and the economy and we have not even started to address its full implications. Officially, SA is one of the countries with the lowest life expectancy in the world but once people reach 60, this country follows a First World life expectancy path,” King says.
He says current approaches to retirement savings are built on a history where life expectancy was 75-79 years but this is no longer the case and retirement savings are not keeping pace with developments.
“Life expectancy increases by five hours per day, making it a moving target that needs to be constantly reviewed to ensure we are on track with the amount we really need to fund our retirement.
“Therefore, the way we think about money and retirement itself needs to evolve to take into account a new paradigm,” King says.
At the most basic level the retirement age has traditionally been 65 and even younger. However, while that might have been appropriate when people lived until an average of 80, it is not necessarily the best approach when people are living up to 90-95. In other words, the time has come for people to consider how to better spend their time and perhaps continue their working life for longer, perhaps up to 70 and beyond.
“Interestingly, in the US out of the 300,000 jobs that are created monthly, most are being taken up by people of 70 and older. They have realised they have retired too early and/or retired with too little money.
“There are significant benefits for employers as older employees have a lot of knowledge and experience and many are prepared to work for lower salaries than their younger counterparts,” King says.
However, on an economic level the shift in the workforce age profile does give rise to possible challenges. While younger people tend to be in an asset acquisition phase, buying cars and houses for example, older people have already bought these assets and their expenditure tends to be lower.
Thus longevity can have an impact on the economy as a whole both in terms of spending patterns and costs such as health care. The longevity reality also calls into question the approach taken to retirement investment strategy.
Traditionally, retirement investing tends to follow a more aggressive path when people are younger and becomes increasingly conservative as people approach retirement. However, as people are living longer they need more money to support themselves for longer.
“Sanlam’s research shows that a married man of 65 has a 50% chance that either he or his wife will live to 94. A lot of people are going to live a lot longer than they ever expected and they need to build that fact into their investment thinking. Therefore, if you are 50, you have a potential life expectancy of more than 40 years, so moving your money into a low-growth asset such as cash does not make much sense,” King says.