| If you’ve done your retirement planning based on assumptions made in 2005 (no, I can’t believe it’s twenty years ago either, in my head 20 years ago is 1980) – then unless it has been regularly reviewed, your retirement plan might not be on track. Back in the noughties it was still considered appropriate to allow retirement capital to deplete over 20 years. In Europe only 1,5% of the population lived over the age of 85, today it is more than double that. You can get a very clear visual idea of just how much longer we are living in the graph below (source: https://ourworldindata.org/life-expectancy)  (If, like me you’re wondering about the blips in the line… In the 1960s this was caused by the devastating Chinese famine caused by Mao’s ‘Great Leap Forward’, in 1994 in Africa it was the AIDS epidemic, and in 2020-2021 it was Covid). Even between the silent generation and the Boomers, life expectancy was up 15 years, and between the start of the Boomers and now, another 20. Living longer is a gift—but it comes with a hefty price tag if you’re not prepared. Here are some of the key financial implications of longevity:  Outliving Your Savings and Investments The most direct risk is simply running out of money. Retirement plans often assume a lifespan of 85–90 years, but many people are living well into their 90s or beyond. Whether we like it or not, that brings another problem, especially for those retirees who have been managing their own investments and savings – in my practice I keep coming across the problem of health and cognitive decline in the sunset years or a surviving spouse who has not been included in the financial decisions and is now at a complete loss as to what to do. I often come across older clients who have been retiring on their savings (money market), and/or living off their dividends. I get it, this can be a cheap and simple way to run your finances, especially if you’re your own ‘stockbroker’. If you’ve been following my blogs, you’ll know that diversified asset management goes way beyond these two asset classes (and I a forthcoming blog is going to go into this in more detail – you’re welcome to email me to get on the mailing list). On a number of occasions, I have had clients give their stockbroker an income they require per month, assuming that this will be covered by dividends – but unless they’re drawing down less than 2% of that capital per annum, then no, it’s not just dividends, but it’s highly likely your capital is being eroded – and quite possibly not sustainably. In money market, you have the opposite problem. Think you can live off the interest on your investment? Sounds good, and looks good to start off with – interest is often more than the sustainable 4,75% per annum, but… inflation is a reality and every year that goes by that interest payment is worth less. In 30 years? Peanuts. You can get around this by only taking 4,5% interest and ploughing the rest back into the investment – but then you might as well get a properly diversified investment. In retirement, when you need an income that is sustainable, grows annually with inflation, and will not run out – to do that you need a mix of asset classes beyond just stocks and money market. The initial income you retire on is an extremely important metric for you to get to grips with – preferably when you still have 10 years of active income ahead of you, but better late than never. My RedFile organisational system which includes basic income statements and balance sheets is free on request, just email me.  Rising Healthcare Costs As we age, medical needs typically increase. Longer life spans mean more years of potential chronic illness, long-term care, and prescription costs. This can strain both personal finances and healthcare systems. We all know that in South Africa (and frankly around the world) healthcare costs have been increasing way above inflation, and there is no indication that this is slowing down. Anyone who has had a medical aid for a couple of decades will have noticed how the premium keeps compounding and benefits decline. Often living longer, comes with a much longer period of declining health. Anyone who has had to navigate ‘frail care’ expenses will know just how expensive it can be (on average, at the moment, it’s around R30k pm – and that’s just the care). Health care costs should be treated as completely separate line item, with its own inflation, and annual increase, especially after the age of 80. This may require that someone takes a lower income initially – say around 3,5% – 4% per annum, so that there is capital that is growing to fund higher expenses later.  Pension and Insurance Strain For governments and companies offering defined-benefit (DB) pensions, unexpected longevity increases liabilities. In most cases this has not been adequately planned for over the last five decades. Most RSA companies woke up to this problem about 30 years ago, which is why we see so few DB funds today). For example, a three-year increase in life expectancy could raise pension costs by up to 9% in the U.S. alone. In South Africa DB pensions are not common anymore, and defined contribution (DC) schemes are more popular. I went into the difference between these various pensions (and the retirement income options) in a recent blog (you can read them here: https://rexsolom.co.za/kick-start-your-own-retirement-plan/ and https://rexsolom.co.za/income-in-retirement-what-your-advisor-might-not-be-telling-you/). Frankly, longevity has made it imprudent for anyone to assume that they are going to live for just 20 years post-retirement anymore. Inflation Erosion Even modest inflation can significantly reduce purchasing power over a 30+ year retirement. Longevity amplifies this risk, making inflation-protected investments more critical. In RSA we have lived with this inflation problem for decades, in the West however they are having to rediscover this skill. This is the problem when one wants to retire on the interest from money market, even if you manage to lock in a higher rate by using a government bond, participation bond etc. (see my paragraph above on this). Assuming inflation of 5%, this is what would happen to the purchasing power of each R1000.   Changing Investment Strategies Inevitably, the older we get, the less appetite we have for the volatility of stock markets, to say nothing of understanding and investing in new technologies coming down the pike. Take AI, this sector of the market is still poorly understood, especially in terms of its long term trajectory (is it going to improve productivity of existing jobs or result in employment?) but still, in the last 2 years it has been responsible for the lion’s share of the growth in the US stock markets, which continue to be on a roll. Longer life spans may require more aggressive (growth orientated) portfolios – and that growth may not be coming from sectors you’re familiar with or diversified (by sector, asset class, geographic location) portfolios to ensure growth over a longer horizon. This includes balancing risk appetite with the need for income and capital preservation. |
 Public Policy Pressure Aging populations increase demand for social services and healthcare, potentially straining government budgets and leading to policy shifts—like raising retirement ages or adjusting benefit formulas. Our South African population is still relatively ‘young’ but our longevity graph is still on the same trajectory as the rest of the globe (where Europe, for example, has started to level off). South Africa’s fertility rate is 2.27 – below the global average. Unlike the West, the RSA old age pension (R2,190 per month for individuals aged 60 to 74) and is means tested. In the UK (where one is obliged to contribute to one’s pension) the monthly pension is circa 1000 GBP (R24,000) after 35 years of contributions. So, while the RSA pension may not affect you directly, because of the means test, those other policy pressures will impact on your pension. Sadly, it already does. In South Africa’s 2024/25 national budget, R387 billion was allocated to social development, which includes social grants like old-age pensions, child support, and disability grants. To put that in perspective, personal income tax alone brought in R739 billion.  In summary then, it is prudent to assume that you could live well into your eighties or nineties, and plan accordingly. If you’re worried about your retirement plan, you’re welcome to contact me for a (no obligation, no charge) consultation. The best legacy you can leave your loved ones is not be a financial burden on them in your dotage. Articles and Blogs: Difficult Financial Conversations NEW Kick Start your own Retirement Plan NEW You matter more than your kids – in retirement To catch a falling knife Income at retirement 2025 Budget Apportioning blame for your financial state Tempering fear and greed New Year’s resolutions over? Try a Wealth Bingo Card instead. Wills and Estate Planning (comprehensive 3 in one post) Pre-retirement – The make-or-break moments Some unconventional thoughts on wealth and risk management Wealth creation is a balancing act over time Wealth traps waiting for unsuspecting entrepreneurs Two Pot pension system demystified Keeping your legacy shining bright Financial well-being when dealing with Dementia and Alzheimers Weathering the storm Pruning your wealth farm Should you change your investments with changing politics? Taking a holistic view of your wealth Why do I need a financial advisor? Costs Fees and Commissions The NHI and what to do about it New-Normal for Retirement? Locking-In Interest rates – The inflation story Situs – The Myths and Reality Tax Residency – New Rules new headaches Are retirement annuities dead A new look at retirement Offshore investing – an unpopular opinion Cobie Legrange and Dawn Ridler, Rexsolom Invest, Licensed FSP 45521. Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za Website: rexsolom.co.za, wealthecology.co.za |