For centuries, humans have grappled with mortality and the fears it brings. We have spent just as long seeking ways to mitigate this risk and prolong life. This quest has included absurdities like ingesting liquid mercury in ancient China, performing young blood transfusions in the late Middle Ages and swallowing radioactive tonics in the early twentieth century. Today, modern medical advances are making longer lifespans a reality. However, these achievements have brought a new challenge in the form of longevity risk, the exact opposite of what we always feared.
Longevity risk is the risk of outliving one’s savings, and this is no abstract worry. Modern society demands self-sufficiency to enjoy life into old age, which means saving diligently for retirement. The real dilemma arises when savings fall short, and capital is depleted before extended lifespans end – resulting in a diminished quality of life echoing those ancient struggles.
However, you shouldn’t have to fear outliving your money. It starts with having a solid financial plan, guided by a professional adviser who will look at what you are able to contribute (inputs), how it grows (investment journey) and how you spend it (take-outs). In financial terms, this equates to capital contributions, internal portfolio behaviour and a withdrawal strategy.
Inputs
Maximise: We often hear that it’s never too late to start saving, and it truly isn’t. Start saving as soon as possible, contributing as much as you can. There are excellent savings vehicles, like retirement funds that offer tax-free, creditor-protected growth, with options to suit various needs and requirements. Also take advantage of windfalls like bonuses, winnings or inheritances by adding these to your savings.
Compound: Adding every bit you can spare unleashes the magic of compounding, where every rand in growth generates additional growth. This compound growth doubles your money at regular intervals based on the growth rate achieved. For example, R1 000 invested at a growth rate of 10% becomes R1 100 after one year, R1 210 after two years, and R1 331 after three years. While the growth rate of 10% remains the same, the rand value of the returns increases each year because you accumulate growth on the returns of previous years.
Waste not: To avoid dipping into your savings, create an emergency fund for those unforeseen events. Generally, an emergency fund should have a value of at least three months of your personal expenses.
Introspection – master your money mindset: Know yourself and your own behavioural biases. It may feel uncomfortable at first but analyse your attitude to money and be honest with yourself.
Investment journey
Diversify: Invest in a variety of asset classes to spread your risk, and review your investment strategy with your financial adviser.
Balance: Strike a balance between risk and your behaviour. Everyone’s investment portfolio is unique, which is why tailoring your financial plan with an adviser is important.
Protect the future you: Remain disciplined by not touching your retirement savings and resist unplanned dips into discretionary funds that are meant to supplement your pension. Remember that your emergency fund is your buffer against unexpected life events.
Take-outs
Guidelines: Preserving your capital requires smart tactics. Take the US theory called the ‘4% rule’ as an example: it suggests that in your first year of retirement, you can withdraw 4% of your total investment portfolio and then increase that amount each year by inflation – with a reasonable chance that your money will last for 30 years. Be cautious when considering such rules, as there is no one-size-fits-all blueprint. Strategies based on sound financial advice are the most resilient.
Waste not: Optimise your income streams by planning for alternative income sources where possible and reinvesting surplus funds to bolster income growth. Consider other flexible savings vehicles that also continue to grow but give you greater control over access to your funds. Delay large withdrawals in early retirement to give your capital the benefit of compound growth.
Choice: There are many products and solutions to choose from, so avoid making hasty decisions. Hedge against outliving your money by blending and combining these to phase in new income streams at different intervals throughout retirement.
Plan: Rising medical costs are a significant factor in longevity. The older we get, the more expensive healthcare becomes. Consider medical aid, gap cover and long‑term care planning.
Purchasing power: Guard against inflation, which will erode the buying power of your money over the course of your retirement years. Consider matching your discretionary strategies to inflation linked solutions.
Legacy: The legacy you want to leave behind will change over time – don’t overlook this during retirement. Regularly update your estate plan and meet with your financial adviser at least once a year to re-evaluate your financial plan, ensuring that you minimise high drawdowns that erode capital too fast.
Introspection: Monitor your own financial behavioural biases and be aware of how they affect the decisions you make about your finances. Be wary of lifestyle creep and scams.
Ancient elixirs belong to the past; today’s true powerhouse is smart planning
Careful planning and discipline can help you harness the power of compounding, emergency buffers, diversified portfolios and nimble strategies – steps to conquering longevity risk. An authorised financial adviser can guide you on your financial journey and ensure you stay true to it.
Written by Annalise De Meillon-Muller, PSG Senior Legal Specialist: Advice