Managing longevity

The emerging trend of increased longevity is one of the most significant risks facing South Africans as they plan for retirement. The challenge advisers face is that they need to bear the responsibility of helping their clients plan appropriately to finance a retirement that is becoming increasingly longer.

Developing a strategic game plan. There are a number of traditional ways to accomplish this beginning with influencing people to start investing earlier. The sooner they start investing, the more time they have to benefit from the power of compound interest.

Advisers also need to influence investment into the appropriate portfolios. Too many people invest in assets which do not provide the return profile needed in order to build a sufficient asset base by retirement. This is typically due to the view that equities are volatile, and that cash is therefore a safe because of the lack of volatility.

This is one of the most dangerous mistakes that an investor with a long-term time horizon can make, as cash is probably the one of the worst vehicles to utilise when investing for the long-term, due to its low return profile that does not protect an investor from inflation risk.

Avoid basic mistakes

There are some basic steps advisers can take when implementing a game plan to hedge longevity risk for their clients:

• Clients should preserve when switching jobs. Preserving enables retirement savings to grow in a virtual tax haven and therefore maximises the potential asset base by retirement;

• Top up investments. The more clients invest, the more clients stand to gain from the markets. Utilising the extent of the available tax breaks provides an efficient manner to accumulate wealth;

• Costs have a major impact on the industry and are something that we need to control. Understanding the impact of asset based fees on investments over the long-term can influence decisions as a few percentage points difference in fees can have a remarkable impact on final asset values due to the power of the forfeited compound growth;

• One of the worst costs to cut during retirement is medical aid costs. Clients should explicitly invest to have finances available to cover the cost of medical aid premiums in retirement; and lastly

• Annuitise appropriately; the right amount of money built up over a lifetime must be placed into the most appropriate annuity at retirement to fund what will be another lifetime. There are a number of new options that have been released by various providers over the last year that enable better longevity management.

The unconventional approach

There are a few non-traditional ways to go about doing this as well:

• Obtaining marketable skills provides an older person with the opportunity to continue his or her formal career or to benefit from a supplementary income while in retirement. Either way, this will reduce the pressure on his or her finances in retirement;

• Review one’s investment horizon; given that increased longevity means that we shall be in retirement for far longer, we should reframe investment horizons accordingly. As such, the 60 year old of today may not have a horizon of three years but 30 years instead. Therefore, investment decisions must then be made in this different context potentially resulting in a different strategy being implemented.

As advisers, you need to stay ahead of the curve in order to help your clients to plan for retirement. I would encourage you to explore the medical advances taking place in order to provide the most suitable advice for clients in a world that is rapidly changing.

The 65 year old of today started work 45 years ago in a world that has become very different. The 20 year old of today is going to retire in a world that is even more different. It is up to each of us to think ahead and act so that we can help them to retire with dignity.