What would you do with 100k extra productive hours?
The increased likelihood of your clients surviving to their 100th birthdays means they could benefit form a hundred thousand extra productive hours during their lifetimes. This refreshing take on the consequences of living longer was shared during a fast-paced talk titled ‘Reimagining society for the 100-year life’, delivered by Prof. Andrew J Scott, Professor of Economics at the London Business School, to the 2022 Discovery Retirement Summit. His grand design: to draw attention to the financial advice community’s shared responsibility to prepare today’s clients for much longer lives in retirement.
“Longevity is the most important trend that individuals and society has to adapt to, and it has enormous implications for financial planning,” said Prof. Scott, to an audience of enthralled financial advisers and planners. Of course, dear reader, this was a virtual event, so our conclusion about how ‘enthralled’ the audience was is entirely based on our own experience… We can, however, remark that the chat message box alongside the video stream was chock-full of encouraging comments, including “awesome presentation”, “well done” and “how insightful”. Kudos to Discovery Limited for assembling such an elite presenter line-up for the event.
Longevity: society’s biggest challenge
The challenge facing South Africa’s financial advisers and planners is that you will have to tweak your financial advice methodologies and product recommendations to accommodate clients who will work well past the traditional retirement ages of 60 or 65 years, and spend far longer than expected in some or other form of retirement. In fact, Recent statistics from the United Nations (UN) indicate that centenarians are the fastest-growing age group, globally. And data from Swedish mortality studies suggest that a person born today has a 90% probability of reaching age 70.
The UN statistics also reveal that there are more people age 65 and over than 64 and under in the world today than ever before. According to Prof. Scott the problem of age and ageing is widely misunderstood. He said that it was not as simple as reflecting on the balance of old versus young in a specific country or community, but rather on the fact that everyone who counts as young today will live to be much older than say, a decade ago. In a nutshell, longevity is about the individual’s length of life getting longer and the probability of the young and middle-aged becoming much older.
The biggest ‘win’ of growing old gracefully
Those blessed with a long and healthy life will find they have more productive hours than they know what to do with. All else being equal, someone living to age 100 could have up to 100000 more productive hours than someone living to age 70. This calculation considers the regular office hours available to someone who works or is active from age 20 all the way until 10-years before his or her death. What might you do with these extra hours? And what behavioural changes will you have to make to accommodate your 100-year life?
Among the non-negotiables shared during the presentation are that Jane and Joe Average will have to consider working well beyond today’s accepted retirement age of 60 or 65 years. More and more people will have to continue working into their 70s, take additional part-time work in some or other form of semi-retirement and even re-skill in their late 50s or early 60s to pursue new career paths. As the longevity trend establishes, your clients will have to reassess their lives and, with your guidance, rethink how to tackle saving for retirement and providing a pension during retirement. This process should start as early as possible.
A wake-up call to the financial advice community
The longevity trend requires financial services providers in both the advice and product disciplines to change how they think about age. Going forward, you will have to replace the notion of chronological age with that of prospective age and / or biological age in your product design and / or financial planning thinking. “As a financial planner you want to know how old your client is; but even more important is how many more years they have got left,” said Prof. Scott. The financial planning process must accommodate the estimated years remaining in a client’s life as well as the likely quality of those extra years.
Another reason why financial advisers and planners should re-think their advice processes in light of longevity, is that a plan that works for today’s middle-age client will probably not work for a client currently in their late 20s. Most financial planners swear by the six-step financial planning process that is described in the Financial Planning Institute of Southern Africa (FPI) Code of Ethics and Professional Standards. And many believe that the clients’ retirement age ‘wishes’ should be discussed as early as step one, the so-called ‘client engagement’ stage.
But Kobus Kleyn, CFP® at Kainos Wealth, says it is more common to discuss such matters during step three, when the financial needs analysis (FNA) takes place. “Your client’s dreams and objectives [may fall under step one], but his or her needs must be clearly defined during the FNA,” he said. Whatever your preference, the holistic financial planning process will have to deal with longevity by going into more detail about when your client plans to retire, how he or she intends to fund this retirement, and the quality of life he or she expects in retirement.
The work to living in retirement ratio
A good way to tackle the longevity discussion is to talk about years in work versus years in retirement. Prof. Scott explained. An American born in 1945 had a life expectancy of 70-years. It was possible for this individual to secure a 50% replacement ratio on retirement by saving just 4% their salary because they could work for 42-odd years, retire at age 62, and then live relatively comfortably for eight years in retirement. The ratio of work to living in retirement was a manageable five-to-one. By 1971, the average life expectance was closer to 85-years.
Under this scenario, an individual would have to save 17% of his or her salary to achieve a 50% replacement ratio at age 65. In this case, the ratio of work to living in retirement shifts closer to two-to-one, or 45 years of work versus 20 years in retirement. And if we live to be 100? Suddenly you are looking at working only one year for each potential year in retirement. If the 100-year life becomes the norm, then financial planners will have to encourage clients to delay retirement for as long as possible, even into their mid- to late-70s.
Adding health to wealth for happiness
Longevity requires going beyond your client’s financial portfolio to consider his or her health, lifestyle and relationships. “As financial planners you should spend more time talking to your clients about intangible assets such as the skills and knowledge that keeps them productive, and their health,” said Prof. Scott. “Your clients’ physical and mental health and friendships and relationships are key intangible assets to focus on”.
The key message from the presentation was that the very concept of retirement is evolving. It can no longer be viewed as a ‘hard stop’ to your or your client’s working life, but rather as the start of a more flexible work / life arrangement that will continue for many years. “We are moving away from a three stage life of education, work and retirement, to what I call a multi-stage life,” concluded Prof. Scott. The trick is to get your clients to centre their financial planning decision making on this new reality, and to think more about what they want from their longer lives.
Writer’s thoughts:
Nobody likes thinking about their final days on this mortal coil; but frank discussions about finances and lifestyle through retirement and making provision for beneficiaries following your clients’ deaths are crucial parts of the financial planning process… Do you have any advice for new financial planners on how to deal with the “how many years until you die” discussion with their clients? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
