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Longevity Risk and An Increasing Life Expectancy

by | Jul 3, 2018

South Africa now has a population of 56.5-million people, according to the 2017 mid-year population estimates by Statistics South Africa. The country’s population has increased by 902,200 over the past year.

A key finding is that life expectancy is now 64 years. This is an extra decade of projected average lifespan since a decade ago. In 2006, women could expect to live to 54.7 years and men to just 52.3 years, with a population average of 53.5 years. This puts the country on track to achieve the National Development Plan goal of a 70-year life expectancy by 2030. In developed economies this number is higher due to better access to medical resources for citizens.

This has created an international debate on the looming retirement crisis created by an ageing population with underfunded savings to meet their financial needs. Below is a look at the average life expectancy across the world. Developed markets lead the charge with emerging markets still far behind, this is however set to change dramatically over the next decade.

What is longevity risk – it is any potential risk attached to the increasing life expectancy of pensioners or policy holders which can eventually lead to higher payout ratios of your existing investments or pension fund assets that are in place to support your income needs.

New technologies, healthier lifestyles and better medicines have all added to an increased life expectancy across the world, which has left many investors and pensioners uncertain on how this will affect them in their later years when planning their retirement income. We find that many investors leave this factor out of their financial planning or leave it until it’s too late, which causes uncertainty around an individual’s life span and leads investors to underestimate how long they are going to live for.

Population aging affects many aspects of public life, from acute and long-term health care needs, to pensions, work and retirement, transportation, and housing. But under the spotlight is the severe implications longevity risk can have on a retiree’s portfolio whereby an investor can run the risk of outliving their retirement savings or simply not saving enough throughout the first phase of their life (the wealth creation phase) which leads to investors not having enough capital to support their income needs in their retirement years.

Solutions to a retirement crisis:

Education and Information – Saving enough over the course of an investors working life is the most important step. But to start saving an educated base will kickstart the process to a good financial plan, which is why people need information, not just at the point of retirement, but leading up to and beyond it. However, this alone will not ensure that individuals have an understanding of how long their financial assets might have to last them in retirement, and therefore, the level of assets needed to provide retirement income for the duration of their retirement. Helping individuals to achieve a basic understanding of how to save, how to manage their savings to last a lifetime and how personal financial products can play a role is essential to achieving true financial security. Education is central to lifetime financial and retirement security.

Flexibility – A robust regulatory framework is critical for ensuring that investors have appropriately been safeguarded when investing in different products and solutions. There should however, be sufficient flexibility in the regulatory framework to support innovation which could also hamper on the availability of advice to clients. The public and private sector are continuously innovating with better solutions at a lower cost. Innovation by product providers will allow consumers to select solutions that best reflect their needs.

Equity – A balance between low and high risk assets needs to be kept to ensure your portfolio is keeping pace with inflation and the increasing cost of living. A high allocation to Equity is always recommended for high growth, this needs to be done in a diversified framework with your advisor.

Advice – In order to help people identify the most appropriate retirement income product for their circumstances, quality information and advice is needed, before and after retirement. Steering people towards guidance and advice is important, which is why surrounding yourself with a team of experts is always
recommended.