Managing Longevity Risk – living a long life without running out of money!

Managing Longevity Risk – living a long life without running out of money!

We all want to live as long as possible, right? Yet many of us worry that we will outlive our nest egg, potentially scrimping and saving throughout the extra years that medical science and healthy living have made possible.

Longevity risk is the adverse financial implications of living longer than you expect. If you underestimate your lifespan you could spend your retirement capital too quickly and have to compromise your lifestyle later in your life.

Conversely, if you overestimate you may underspend throughout your life and your children will be travelling in business class instead of you.

Currently life expectancy at age 65 is 19.6 years for New Zealand males and 21.7 years for females but these tables often underestimate future mortality improvements and can underestimate lifespan. I advise couples to expect that at least one of them will live into their 90s.

Centenarians are one of the fastest growing sectors of the population and the UN predicts that worldwide their numbers will increase eightfold by 2050. Research on identical twins shows that 25% of their longevity is due to genetic factors while 75% is due to lifestyle choices.

Residents of Okinawa (Japan), Sardinia (Italy) and Seventh Day Adventists in the USA are some of the longest living populations on earth and have been extensively studied.

Here are some of the common characteristics of centenarians the world over:

Physical activity: While centenarians tend not to formally exercise they are engaged in physical activity. This is may be farming or gardening.

Stronger social relationships are known to prolong the lifespan. In many long lived cultures the elderly remain valued members of the community. Solid relationships and a positive personality are common among the very old. Staying engaged in the work force provides social engagement as well as income.

A healthy diet: Long lived communities often embrace an Asian diet based around fish, soy products and vegetables or the Mediterranean diet, olive oil, lean protein and vegetables. More research is revealing the benefits of remaining lean and even intermittent fasting. In Okinawa they say “hara hachi bu”- eat until you are four fifths full.

Not smoking: Smoking will take ten years (on average) from your lifespan.

A 2018 American Heart Association study suggested that those who followed these five healthy habits could live a decade longer than those who don’t:

  • Not smoking
  • Limiting alcohol
  • Regular excercise
  • A healthy diet with lots of vegetables.
  • Maintaining a healthy weight

 

If we do not want to outlive our financial resources, early financial planning becomes essential. Some ways to increase your retirement nest egg include optimising KiwiSaver, accelerated mortgage repayment and saving into a diversified portfolio. Staying engaged with paid work beyond the age of 65 is another option, whether it be part time, job sharing or in a completely different field.

Understanding how much retirement income you are likely to require and the gap between NZ Superannuation and what you will need to fund from your own resources is vitally important. A good financial adviser can help you accumulate wealth and then adjust the rate of decumulation so your funds last as long as you do.

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