Longevity and retirement…60 is the new 40
By Viresh Maharaj, Chief Marketing Actuary: Sanlam Employee Benefits
One of the most significant market trends across the globe is the continuing increase in human longevity. On a macro level, this will impact the development of social and economic policies in both developed and developing nations. On a micro level, individuals now entering retirement face a very different picture to the one that they have been planning for throughout their working lives. As a responsible financial industry, we need to understand the changes taking place in order to structure a system that will enable retirees today and in the future to lead fuller and more dignified lives.
Science has found that the blueprint of the human body is not intended to fail with age, but rather that it was not designed for long-term use. This means that aging and death are not hard-coded into our biology, suggesting that our health and lifespan are modifiable variables that can be influenced by behaviour changes, medical intervention and biomedical science. For instance, increases in longevity have resulted largely from advancements in medical technology and practice, better pharmaceuticals, healthier lifestyles and material declines in smoking.
For working South Africans, this means that the assumptions historically used to plan for retirement are no longer applicable, as we are living for far longer than our predecessors. As an illustration, some experts believe that individuals should now be making provision for a life in retirement stretching up to 40 years on average. Furthermore, research in game-changing medical fields such as molecular nanotechnology suggests that we cannot yet reliably estimate how much longer a current 20-year-old will live into the future.
The risk in our context is that South Africans will simply not have enough money by retirement to carry them through their longer golden years. This risk is exacerbated by the reality that many workers moving into retirement will need to support their children, given our high rate of youth unemployment, as well as their own parents, who will themselves live for longer.
There are a number of ways that we can start addressing longevity risks on structural and professional levels, including:
- Increasing the retirement age. This has been implemented in the UK and France, to some public outcry, in an attempt to manage the state’s obligations in those countries.
- Introducing phased retirement. By restructuring the exit of employees from the workforce so they continue working past their normal retirement age in a stepped manner over time.
- Retirees taking on a second career to meet their living expenses. This may take the form of small businesses, part-time work or reskilling in a different field. This change presents an opportunity for financial advisers to play a greater role in equipping retirees to live better in retirement.
- Eliminating the compulsion to withdraw retirement savings at retirement. This will enable retirees who have an alternative income, say from a part-time job, to continue to benefit from the power of compound interest as well as the tax efficiency of these vehicles up until the point that they need to draw on these funds.
- Reconsidering the value of guaranteed annuities in the context of increased longevity risk, as this risk is borne by the insurer and not the retiree.
- Providing appropriate investment and draw-down advice on living annuities and other nest eggs in the context of significantly increased longevity.
As the financial services industry, we have a responsibility to our clients to lobby government to effect the legislative changes necessary to cope with this increase in longevity, design relevant products that address the needs of retirees in this context, and provide the most appropriate advice during the respective stages of their lives to improve the quality of their retirement.