Will your client survive old age?
The world is different to what it was fifty years ago. If you ask your parents or your grandparents if they ever thought that they would live to ninety, you will most certainly get a response of both laughter and shock.
While the gut reaction to the prospect of a healthier life and in turn living longer is typically excitement, the complexities surrounding increased retirement duration need to be monitored with caution.
Life expectancy continues to change
In 1950, the life expectancy of a UK male exiting the work force was approximately eleven years. In the year 2000, the equivalent life expectancy exceeded twenty years. This means, that in fifty years, the average life expectancy of a male born in the UK and exiting the workforce has more than doubled.
Although there are several factors offsetting longevity improvements, such as increased levels of obesity, diabetes and reduced physical exercise, overall longevity is increasing dramatically. The main reasons for this in South Africa are improved access to primary healthcare, pervasive health education and a reduction in negative mortality habits such as smoking.
The impact on retirees
Retirees are in the direct firing line of these improvements in longevity. As an example, an individual today with a life expectancy of ten years looking to receive an income of R10 000 per month increasing at 5%, will require approximately one million Rand. The same individual with a twenty five year life expectancy will require as much as two million Rand.
Longevity versus life expectancy
Longevity refers to the overall probability of an individual living to a specific age. Life expectancy refers to the average duration before an individual is expected to die. This is a critical distinction as retirement planning for a specific life expectancy means that there is a 50% chance that you will outlive the retirement plan. Consideration needs to be given to the risks of outliving all future age brackets in order to properly understand the financial risks of retirement.
Protecting against longevity
The primary method of protecting a retiree against longevity remains the guaranteed annuity. An individual can invest his retirement savings with one of several insurers. Guaranteed annuities will pay an individual for as long as he and/or his spouse are alive. This will transfer the longevity risk from the individual to the insurer.
The purchaser is insured against living longer than expected; income is guaranteed for life. Taking increased longevity into consideration, with the reduced ability to generate an income as a retiree ages, the value of this feature is significant.
There is also investment security when purchasing a guaranteed annuity. Fluctuating stock markets do not affect the income. The investment strategy is managed by a knowledgeable team of investment specialists and carefully governed by the Long-Term Insurance Act ensuring maximum protection and value for purchasers.
Underwritten annuities
The calculation of longevity is a critical component of a guaranteed annuity calculation. Almost all insurers calculate the life expectancy of an annuitant by taking into account age and gender only.
However, there is one provider in South Africa that fully underwrites guaranteed annuities. This is done by extending the consideration of factors impacting longevity including lifestyle, income, occupation, smoker status as well as any medical diagnoses. By more accurately identifying an annuitant’s individual longevity, an underwritten annuity is able to enhance retirement income by as much as 150%.
Going forward
Both individuals and advisers need to be aware that longevity, and in turn life expectancy, are increasing. This means that ongoing advice, before and after retirement, on how to handle increasing longevity remains a critical component of each and every retirement plan. This includes the presentation of cost effective solutions that exist to protect individuals from the negative impacts of longevity.
