Financial planners like to say that failing to plan is planning to fail. What it really means is that by failing to plan properly you are dumping a hot mess on your children. And this applies both to planning for your retirement and planning for your death. Few people plan to punish their children when they die or retire but it often works out that they do just that.
Planning means thinking very seriously about the future. Our future is changing and to quote Peter du Toit of Rezko Investments, “the future isn’t what it used to be.”
For almost everybody in their late forties and older, thoughts of life have been neatly divided into three stages viz: Education; Employment and Retirement, also called Learning, Earning and Yearning. We have thought like that since the end of World War Two. And it seemed to work as long as everyone worked, earned and saved for a longer time than they were retired. Roughly speaking our belief was that men died at age 79 or 80, and women lived four years longer. Taking age 80 as an end date meant retiring at 65 and living off the money for another fifteen years.
But if a book by Professors Lynda Gratton and Andrew Scott (both of the London School of Business) titled “The 100 Year Life” is to be taken seriously our thinking should be based on living to 100 years old. From retirement at 65 that’s another 35 years of life. For some that might mean being retired for longer than they worked.
For this everyone will need more capital for retirement and more life assurance cover for the spouse who may be left behind who will need correspondingly more money for the longer life that awaits.
The professors believe that the traditional three stage life will need to be modified into what they call the “multi-stage” life. Most of us will need to have a longer working life for two useful reasons: The first is that this should allow us to earn for longer and thus save more while allowing our retirement capital more time to grow; and the second is that the later we retire the shorter the period for which our money needs to last.
The effect is interesting and an Australian actuary has worked out that for every year you put off retiring and continue to save, your potential pension from all sources will increase by approximately 10 percentage points. If you put off retiring for five years your pension should increase by 50 percent. Thus, the later you retire the better.
However, this can lead to planning problems as most savings are pitched at people retiring at the company’s retirement age. But it is unlikely that they will have enough money saved by then to ensure a comfortable life through to the one-hundred-year mark.
So financial planning now needs to consider how you will deal with retiring on what is probably too little money to carry you through to your 100th birthday. You will need to find an occupation that will at least allow you to survive without touching your retirement capital until time has had its effect and the money has grown sufficiently.
The best way to prepare for this changed approach to life expectation is to start investing in new skills. When your official retirement date dawns you can be prepared and skilled for the new lease of life that awaits you. With new or updated skills, you may even retire early from a long-term employer and embark on your new life sooner.
The irony of our situation is that in South Africa retirement preparation is such a mess that vast numbers of people are grossly underfunded even for the traditional life expectancy. Upskilling while they still work will enable many to sort out their retirement underfunding by using their new skills to extend their working lives, save more, and catch up with retirement provision in the extra years of work.
Dave Crawford CFP®
23rd April 2019