A plan to mitigate longevity risk 

Longevity risk is the risk of outliving one’s savings, and this is no abstract worry. Modern society demands self-sufficiency to enjoy life into old age, which means saving diligently for retirement. The real dilemma arises when savings fall short, and capital is depleted before extended lifespans end – resulting in a diminished quality of life echoing those ancient struggles. 

Tackling the fear 

You shouldn’t have to fear outliving your money. Opting for a steady retirement income by using a product designed for this, like an annuity product, beats stashing your money under the mattress. But even the best products and solutions cannot compensate if there simply is not enough to go around. The more you spend (draw down), the faster you will deplete your capital in a living annuity. Guaranteed annuity products also have their limits. The best strategy is to pair the right products and solutions with disciplined planning to make your money last. 

To simplify this, focus on what you contribute (inputs), how it grows (investment journey) and how you spend it (take-outs). In financial terms, this equates to capital contributions, internal portfolio behaviour and withdrawal strategy. 

Inputs 

Maximise: We often hear that it’s never too late to start saving, and it truly isn’t. Start saving as soon as possible, contributing as much as you can. There are excellent savings vehicles, like retirement funds that offer tax-free, creditor-protected growth, with options to suit various needs and requirements. 

Compound: Adding every bit you can spare unleashes the magic of compounding, where every rand in growth generates additional growth. This compound growth doubles your money at regular intervals based on the growth rate achieved. For example, R1 000 invested at a growth rate of 10% becomes R1 100 after one year, R1 210 after two years, and R1 331 after three years. While the growth rate of 10% remains the same, the rand value of the returns increases each year because you accumulate growth on the returns of previous years. 

Waste not: To avoid dipping into your savings, create an emergency fund for those unforeseen events. Generally, an emergency fund should have a value of at least three months of your personal expenses. For example, if your personal expenses for a month are R5 000, then the recommended value of your emergency fund would be R15 000. 

Introspection – master your money mindset: Know yourself and your own behavioural biases. It may feel uncomfortable at first, but analyse your attitude to money and be honest with yourself. You can overcome your weaknesses. 

Last word: Saving should never stop, and doesn’t have to stick to a rigid routine only – you can add more at any point. Stay nimble and take advantage of windfalls like bonuses, winnings or inheritances by adding these to your savings. 

Investment journey 

Diversify: Invest in a variety of asset classes to spread your risk, and regularly review your investment strategy with the help of an authorised financial adviser. Embrace change and adjust asset allocations as needed, especially as retirement approaches. 

Balance: Strike a balance between risk and your behaviour. Avoid extremes and be wary of being too aggressive or too conservative. Everyone’s investment portfolio is unique, so tailor yours to build and preserve wealth. 

Protect the future you: Keep your hands off your retirement savings and resist unplanned dips into discretionary funds that are meant to supplement your pension. Remember that your emergency fund is your buffer against unexpected life events. Don’t allow your discipline to slip. 

Take-outs 

Guidelines: Preserving your capital requires smart tactics. Take the US theory called the ‘4% rule’ as an example: it suggests that in your first year of retirement, you can withdraw 4% of your total investment portfolio and then increase that amount each year by inflation – with a reasonable chance that your money will last for 30 years. Be cautious when considering such rules, as there is no one-size-fits-all blueprint. Flexible strategies often prove the most resilient. 

Waste not: Optimise your income streams by planning for alternative income sources where possible and reinvesting surplus to bolster income growth. Consider other flexible savings vehicles that also continue to grow but give you greater control over access to your funds. Delay big withdrawals in early retirement to give your capital the benefit of compound growth. 

Choice: There are many products and solutions to choose from, so avoid making hasty decisions. Hedge against outliving your money by blending and combining these to phase in new income streams at different intervals throughout retirement. 

Plan: Rising medical costs are a significant factor in longevity. The older we get, the more expensive healthcare becomes. Consider medical aid, gap cover and long-term care planning. 

Purchasing power: Guard against inflation, which will erode the buying power of your money over the course of your retirement years. Consider matching your discretionary strategies to inflation linked solutions. 

Legacy: The legacy you want to leave behind will change over time – don’t overlook this during retirement. Regularly update your estate plan and reconsider your strategies; recalibrate to sidestep high drawdowns that erode capital too fast. 

Introspection: Monitor your own financial behavioural biases and be aware of how they affect the decisions you make about your finances. Be wary of lifestyle creep and scams! Continuously question your own spending. 

Conclusion 

Ancient elixirs belong to the past; today’s true powerhouse is smart planning. Harness the power of compounding, emergency buffers, diversified portfolios and nimble strategies to conquer longevity risk. Partner with an authorised financial adviser to fine-tune it all. Don’t just survive longer: thrive across generations. Your legacy starts now.