Living long time
19 February, 2016
I was chuffed recently to visit the new home purchased by an aunt in her 70s, just after she'd moved in. The place feels homely and perfect for her as security, convenience and a friendly neighbourhood are important for a lady living on her own.
I was also impressed she had singlehandedly dealt with selling a house, buying another, arranging the move and sorting her finances so everything happened tickety-boo.
After the dust had settled (not that there was any) she quickly rearranged her finances so they were 'back to normal' after the house transaction. That impressed me the most.
She knew how much she needed in the bank to make her feel safe. She knew what needed to be invested to give her income to live; she had earmarked the "harder working assets" that would hopefully grow in the background — because she reckons she's going to be around for quite a while.
Not all older people are as together and well organised in their retirement years. That's not a criticism — I think it's criminal people are offered all the hand-holding in the world leading up to retirement and then unceremoniously dumped and left to their own devices.
My industry is not alone in regarding the pre-retirement years as the most attractive. That's when people are generally accumulating and preparing for retirement; they often have a significant amount of money at their disposal. Once in retirement — the decumulation phase — people are understandably less willing to spend their money because it has to last them to their final day.
The question of what to do with one's money in retirement sounds a rather simple one. It's not.
For those dependent on the state, it is all about having enough money to afford three meals a day and keep the house warm. For those lucky enough to have a bit more, like my aunt, there are fewer decisions to make but still many imponderables to consider.
How will I know I have enough to see me out, when I don't know how long I've got? What sort of returns do I need to ensure I have enough?
Using industry jargon, retirees face investment risk and longevity risk. It's the longevity risk that's the real brain twister. Apparently we all under-estimate or over-estimate how long we're going to live.
According to the British Institute of Fiscal Studies, 65-year-olds under-estimate how long they're going to live, whereas 85-year-olds over-estimate. This leads to us either spending too much in our retirement and running out of savings; or spending too little and living an unnecessarily frugal life, just in case.
Given that our life expectancy keeps increasing with each day we're alive, it's probably not surprising most of us get it wrong. Life expectancy in rich countries like ours is increasing by about 2.5 years per decade or 15 minutes per hour. Think about that, every hour you live means another 15 minutes at the other end…
Over the years, various solutions to longevity risk have been promoted including annuities and reverse mortgages, giving retirees certainty of income in their retirement years. Unfortunately, none is failsafe nor appropriate for everyone.
Hence my admiration for my aunt who has found a solution that works for her. Nothing too complicated; it just works. She has thought about how she can make the most of what she has.
That has to be a good starting point.