Living longer is all the rage — but it has its own pitfalls
You need insurance and investment. Not one or the other.
Andrew Davison
Head of advice at Old Mutual Corporate Consultants
● Longevity is the 21st-century buzzword. Newsfeeds abound with stories of extraordinary older people achieving extraordinary feats. Orville Rogers, a 100-year-old marathon runner, says, “I can because I do”. At 97 years old, Tao Porchon-Lynch is the world’s oldest living yoga teacher. Stories of these outliers capture our imagination.
Even reputable media is fascinated by longevity. “This Baby could live to be 142 years old” was the startling caption on the photo of a baby on the cover of Time magazine. Sanlam’s recent 200 Year Life campaign stirred much debate. Despite these headlines and campaigns stimulating conversations about longer lifespans, do they help or hinder us in projecting how long we will actually live?
As life expectancy is one of the most important variables in retirement planning, having a good sense of how long we are going to live is crucial. For retirees needing to ensure that they have a sustainable income for life, it is difficult to see the wood for the trees. On the one extreme we hear we are on the dawn of a 200-year life and on the other extreme, Statistics SA estimates life expectancy at birth to be 61.1 years for males and 67.3 years for females. Figuring out an ‘average’ can be hugely problematic.
Work for as long as you can
SA’s ‘average’ life expectancy data is skewed by the combination of our apartheid legacy, the Aids epidemic and persistent high inequality. Life expectancy is massively influenced by income, education and health, making SA’s ‘average’ relatively meaningless. If you have reached the official age of retirement of 60-65 years old, you have already surpassed the national average.
If we can’t rely on an average, what benchmark should we use for our own retirement planning? For those entering retirement, it is important to note the distinction between life expectancy at birth and life expectancy from age 65. Although life expectancy from birth has risen dramatically over the past 70 years, the increase of life expectancy after the age of 65 has been comparatively smaller.
However, if you are in good health, received a good education and earned a decent income, your chances of living a longer life increase. The “Risky Business: Living Longer Without Income for Life” report issued by the American Association of Actuaries stated that a 65-year-old man has about one in five odds of living to age 90, a 65-year-old woman has almost one in three odds of living to age 90 and a 65-year-old couple has a 45% chance — almost 50/50 — that one of them will survive to age 90.
To get a more individualised life expectancy, visit www.livingto100.com. The calculator generates your projected life expectancy based on your answers such as your age, country of residence and postal code, education level, income, exercise, diet and stress levels. Having a good sense of your unique life expectancy can help you to figure out when would be a reasonable age to retire. To be safe, anticipate living longer than you think. Not doing so may have dire financial implications.
Professor Neil Krige from the University of Stellenbosch says the message about the need to work until your maximum retirement age needs to be conveyed morning, noon and night. Let’s say you plan to retire at age 60 and you have a reasonable expectation of living to 80. You need to provide for 20 years in retirement.
Increase your contributions
However, if you were prepared to retire at 65, you would then only have to provide for 15 years in retirement. That is a 25% shorter retirement period. Krige says it is important for people to understand the enormous impact of this. Not only are you continuing to contribute to your retirement savings, but you are not accessing your capital and your nest egg is being exposed to the investment market for an additional five years.
Krige also suggests increasing the percentage of your contribution to your pension fund, especially 5-10 years prior to retirement. The bigger your annuity cake at retirement, the more likely you are to retire with dignity and avoid “money death”.
Andrew Davison, head of advice at Old Mutual Corporate Consultants, says when South Africans reach retirement, they are faced with two fundamentally different products. The one is a guaranteed annuity, or insurance product, and the other a living annuity, which is an investment product.
“People get confused thinking they need to choose between the two. You need insurance and you need investment. Not one or the other. Both address very different needs,” says Davison.
Choosing a combination gives you some certainty of the income you will receive every month from your guaranteed annuity and some upside of market exposure on the living annuity side.
The best way to manage your retirement and ageing experience is to see it as a dynamic process.
As Davison says, retirement planning is like a heat-seeking missile as the exact location of our actual date of death is unknown. It requires recalibration, starting with the best estimate and adjusting as you get closer to the end goal.