The average lifespan of Indians is increasing. In 1990, if life expectancy was 58 years, it has increased to 69 in 2017. Thanks to medical advancements and achievements of scientists and gerontologists, by 2050, we could expect to live for over 75 years.
While this is good news, as we get more time to spend with our loved ones and pursue our favourite hobby, we are also exposed to a new type of risk called the longevity risk. With increased life expectancy comes the risk of outliving one’snest egg.
If retirees are unprepared, golden years might not be as golden. Here are somestrategies to adopt for living a happy long life.
1. Elongate Income Streams
There is an unspoken rule in retirement planning – you spend two-thirds of your life in the accumulation phase – saving for and a third in drawdown.
By that logic, if your life span has increased, you need to work longer or have alternate income streams to support youryears.
However, on reaching 60 years, most people hang up their boots. Somehow, they are fixated with that number. And this has been happening for ages despite the fact that our average lifespan has increased manifold (See chart).
So, first of all, reconsider retirement until you have to. After all, 60 is just a number. However, look for the ‘right’ job that suits your age. It could be part-time, full-time or work-from-home. Ensure its not physically or emotionally draining, while also promoting social connectivity and creativity.
Working longer has the advantage of not only supporting current expenses but also delaying the need to tap thekitty and allowing it to grow in the process.
For those who can’t work anymore due to health or other reasons, consider creating income streams.
Extra savings act as effective buffers – especially to take care of financial surprises in the form of expensive health care treatments. Plough these savings systematically into equity funds – by automating your investment process.
2. Growth-orient yourportfolio
Standardstrategy of investing into safe and conservative assets might not work. This is because investments into bonds and cash equivalents stand the risk of losing their purchasing power when you withdraw. Moreover, there is also the risk of portfolio returns not being sufficient to last your lifetime.
Inflation and investment risk therefore need to be managed prudently.
For example, a 6% annual inflation over a 24-year period could reduce your purchasing power to a fourth. That means if you retire at 60, by the time you reach 84, you would need four times the money to maintain the same standard of living.
By investing into growth assets, such as equities, you not only stand a better chance of beating inflation but also in the process increase the chances of yournest egg keeping pace with your life span. So, increase the proportion of equities in your portfolio to the necessary percentage (this will vary depending on your needs and ability). With a longer investment horizon, could prove to be a better bet.
3. Create saving buffers
Once you arrive at a retirement goal, work backwards to know how much you need to save from your current income. Say, if it entails saving Rs 25,000 every month, try stretching it to Rs 30,000 or more. It can be done by bringing down unnecessary expenditure.
Extra savings act as effective buffers – especially to take care of financial surprises in the form of expensive health care treatments. Plough these savings systematically into– by automating your investment process.
Living longer also means you need to start early. Power ofwill ensure you reach your goal faster.
4. Sustainable drawdown
Living longer has implications for your retirement corpus. Ensure annual withdrawals from your corpus are sustainable and not more than 4% assuming your corpus is 25 times your annual expenses. That way you ensure your kitty takes care of expenses for the next 25-30 years.
As lives becomes longer, the traditional phase of education, work andis getting altered. Increasingly people are ‘unretiring’ with intermittent times of work, break and career training.
In short, longer lives calls for working and investing differently from the past. By working longer and investing aggressively into equities, your retirement savings stand a better chance of keeping pace with you.