One of the key variables used in retirement planning is life expectancy of our clients and their spouses or partners. Financial planners may use their own estimates or use available data from the insurance industry. Life expectancy is probably one of the, if not the most important variable in the retirement planning process, ie if you are constructing a retirement plan with a life expectancy in the mid-80s, your retirement plan could be fundamentally flawed as the plan could underestimate life expectancy by 10 years or more. This can leave clients destitute in retirement.
Even though no-one can plan exactly how long they will live, as many things in our lives are outside our control, people are generally living longer today than before. This fact can be attributed to continued advancements in technology and innovations in the field of medical treatment.
Over the past century, global life expectancy has increased by more than 25 years and continues to increase. The dramatic increase in life expectancy can best be illustrated through the graph below left, illustrating the continued increase in life expectancy across the world. The trajectory and continued increase in life expectancy is clearly evident.
The continued increase in life expectancy is captured in two recent statements. The first from the Stanford Centre on Longevity, “By the middle of this century, living to the age of 100 will become commonplace, continuing a remarkable trend that saw human life expectancies double between 1900 and 2000, increasing more in a single century than across all prior millennia of human evolution combined,” and the second from Aubrey de Grey, Biomedical Gerontologist, “The first person to live to 150 has already been born”. Even though these citations are from developed markets, this is a reality for the South African insured population, ie our clients.
Before we delve into the South African numbers, let’s first reflect on clients’ expectations. From consultations and discussions with clients, I am sure you have also experienced that most clients completely underestimate their life expectancy, ie they do not expect to live to 80, 90 or 100.
This is evidenced in research conducted by Just Retirement Life (South Africa) where clients before retirement underestimate their life expectancy by a staggering 10 years! The chart below shows what age people expect to live to, based on current age. What is clear from the graph is that younger clients significantly underestimate their life expectancy. As clients grow older, they start realigning their expectations as they realise they may live significantly longer than they expected. Not appropriately accounting for these additional 10 years and longer could mean the difference between a long and comfortable retirement and retirees outliving their money.
From the available South African mortality statistics, it is important to develop retirement plans for living into the 90s and 100s. The following are the facts; a couple aged 65 has a high probability of living into the mid-90s and beyond, 35% of men are expected to live to 89 and beyond and 35% of woman are expected to live to 94 and beyond. This continued increase in life expectancy is profound and has or should have – a significant impact on how we think about life and retirement planning. It also challenges the conventional wisdom of developing a retirement plan for age 60 or 65.
We need to fundamentally rethink the traditional definition of retirement being a “line in the sand” and a retirement plan starting at 60 or 65. Increased life expectancy requires a reframing of the retirement conversation to a lifetime framework and understanding our clients’ multiple chapters after the traditional and outdated “normal retirement age”. It becomes increasingly important to change the conversation with clients to ensure we have a deep understanding of their lifetime plan, after 60.
A lifetime plan could include multiple chapters after 60. This could include continuing in full-time employment, part-time work or consulting, travelling and exploring, slowing down, medical care and/or frail care. Understanding clients’ multiple life chapters after 60 allows developing a lifetime financial plan with multiple chapters to 100 and beyond. This can be very different to developing a traditional retirement plan for a client “retiring” at 65.
The United Nations describes population ageing and increased longevity as a “human success story that gives us a reason to celebrate public health, medical advancements, economic and social development over diseases, injuries and early deaths that limited human life spans throughout history. Population ageing has been recognised as one of the four global demographic megatrends, next to population growth, international migration, and urbanisation, which will all have a lasting impact on sustainable development”. Financial planners need to have a deep understanding of not only life expectancy but also the significant advances we have seen and are likely to continue seeing in life expectancy.
If the reality has not hit home yet, you and your clients may live a lot longer than you and they planned for! Financial security starts with your Client’s Life to 100 plan and should then be supported by a sound financial plan.