THERE are certain conversations most of us shy away from despite their importance. Today we’re going to have one of those…
This is so important I won’t beat around the bush: True retirement begins the day we stop working for actively derived income, and it ends on the day (or night) we die.
The unknown interval between the start of true retirement and its terminal conclusion is the crux of what we will examine today. If you’re a regular reader of this New Sunday Times column, you might already know I am a licensed financial planner who, in general, aims to help my clients harness the powerful process that is ‘financial planning’ to meet their life goals through the proper management of their finances.
I also specialise in crafting and managing retirement funding portfolios for those same clients throughout their active working years and, more importantly, during their retirement.
I’ve done this for many years and, God willing, I hope to keep doing this for two more decades. As you can well imagine, even up to this point I have had far more conversations about how death awaits us all than I care to remember. Nonetheless, I try not to let those sombre client-planner conversations sink further into a quagmire of morbidity. I usually succeed.
But not always...
The worst version of many such conversations is when I am getting to know a new client who is in his or her 50s or early 60s, who then blurts out:
“Rajen, I won’t need too much money for my retirement because I WILL die at 70.”
My incredulous answer is always:
“Really? Mr or Ms Client, I don’t believe you’re contemplating suicide, so how do you know WHEN your precious life will end? Also, what happens if you’re wrong and you don’t die when you think you will but instead live on for many more years? How will you pay for those extra bonus years?”
I find each such conversation draining. Still, they have all helped me clarify what I do and do not know! For instance, I don’t know when you, I or anyone else will checkout from Planet Earth. But I do trust the predictive power of The Law of Large Numbers.
If you’re unfamiliar with this statistical law then please take note that in the world of viable insurance companies and the data-packed mortality tables they use to figure out average lifespans and insurance policy premiums (or premia if you’re a Latin buff), the law can be described this way:
“As the number of policyholders increases, the more confident the insurance company is (that) its prediction will prove true.”
So, trundling away from insurance to the realm of demographics, we find that human lifespans are rising and have picked up pace since the start of the 20th century. The fastest growing age-based demographic slice (admittedly from a tiny base) is the centenarian group.
Today, in 2019, there are an estimated 500,000 people over 100 years old. By 2050 the world is likely to have between 3.7 million and six million centenarians; and at least one reputable source (www.researchgate.net/publication/315325938_Worldwide_demography_of_cente...) suggests that by 2100 when Earth's population is projected to be 50 per cent larger than today there will be 25 million or 50 times more centenarians!
Bottom line: The law of large numbers, coupled with better healthcare and nutrition, suggests we’re more likely to live long than die young, which is great news. But in a world system where more and more money is needed each year by each of us just to maintain our chosen lifestyles, this grim question rears its head: How will I pay for my life in full retirement?
Put another way, here's a conundrum for most of the human race: With ever lengthening lifespans how should well-prepared people face and deal with longevity risk?
I don’t have all the answers but I can provide you with four pointers illuminated by the financial planning process:
1. If you have children, train (indoctrinate?) them so well they know in their heart of hearts they should exercise Asian filial piety and care for their elders (meaning you);
2. If you don’t have children or can’t wholly rely on those you do have for financial support in your dotage, work for a pension. Sadly, corporate pensions have gone the way of the woolly mammoth and dim dodo. And state pensions are becoming tougher for bankrupt governments worldwide to fund;
3. Save and invest wisely for as many decades as you are able to work actively with the laser-focused goal of buying assets that generate passive income in the form of interest, dividends, distributions and rental, which will one day replace your active income that stops in true retirement; and
4. Regardless of what age you think you will shuffle off this mortal coil, for safety add five or 10 years to it for retirement funding calculations so that you compensate somewhat for longevity risk, which is the biggest risk most retirees will face.
Your future, older self will thank today’s younger YOU for taking as many of my four retirement preparedness steps as possible. With that, I leave you with Star Trek’s Vulcan greeting:
“Live long and prosper!”
© 2019 Rajen Devadason
Rajen Devadason, CFP, is a Licensed Financial Planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com; he may be connected with on LinkedIn at www.linkedin.com/in/rajendevadason, or via [email protected] You may follow him on Twitter @RajenDevadason.