The new reality of longevity and investing
In addition to working longer, people have two other options to mitigate longevity risks: saving more and investing to optimise retirement assets
FOR the first time in human history, older populations are growing at a faster pace than the youngest cohorts, ushering in an unprecedented demographic shift worldwide.
By 2050, 2.1 billion people – nearly 22 per cent of the global population – will be over 60, including 426 million over 80. In contrast, 50 years ago just 8.38 per cent of the total population were over 60.
Drilling down further, research from Fidelity International, in partnership with the National Innovation Centre for Ageing, reveals two in five people aged 50 and over are facing a retirement savings shortfall of at least a decade. The 10-year savings gap was revealed by comparing how long people expected their retirement savings to last against the average life expectancy in their location.
As life expectancy continues to rise, the challenge is only growing. By 2050, an estimated 3.67 million people globally are expected to reach 100. When measured against a potential 100-year lifespan, nearly four in five (81 per cent) aged 50+ are underprepared by at least a decade.
Interestingly, individuals in Singapore seem to be the most ready for the new realities of longevity, with only 65 per cent having under-planned by 10 years or more for a 100-year lifespan. This is in sharp contrast to countries like France (93 per cent) or Hong Kong (82 per cent), where a vast majority are under prepared for retirement.
Managing the longevity risk
In addition to working longer, people have two other options to mitigate longevity risks: saving more and investing to optimise retirement assets. Longer lifespans have increased the risk of individuals outliving their savings. At the same time, they carry more of the financial burden of both saving and investing for retirement.
Given the complexity, it is important to note that the way you accumulate retirement assets shapes the options during the drawdown stage – or what’s known as decumulation – and vice versa.
One question we are often asked is “How much should I be saving?”. While there is no one-size-fits-all answer, there are ways to think about this. During working life, many people might set a target for their retirement portfolio, such as a million dollars. However, longevity risk shows why this might be a flawed approach. What if inflation, market movements or low interest rates at the time of retirement (or during retirement) do not provide the expected monthly income for retirement?
Two key considerations are how to save in light of longevity risks and how to manage portfolio withdrawals during retirement. The main concern is the level of income that an investment portfolio can generate throughout an individual’s lifetime. Discussing retirement savings from this perspective links the accumulation and withdrawal phases.
The fact is, investing for retirement does come with uncertainties, which is why maximising the options you have when you retire is immensely valuable. A substantial retirement fund provides greater flexibility in decision making, whether one chooses to continue working, allocate resources toward healthcare, or offer financial support to children and grandchildren.
The decisions you make regarding saving and investing your retirement assets should maximise your flexibility during the drawdown phase. It is essential to consider these factors well in advance. Delaying this process until you are close to retirement significantly reduces the range of options available to you.
Retirement also requires confronting tradeoffs, for example, compromising by leaving a smaller inheritance in exchange for greater financial flexibility elsewhere. The precise goals may be unknowable today, but the need for financial resources will not be.
Shifting investment strategies in retirement
It is widely recognised that retirement savings should be invested in a diversified portfolio, comprising growth assets such as equities, real estate, and higher-yielding bonds. However, managing retirement drawdown involves a distinct set of risks. Notably, making withdrawals during periods of market decline can severely impact financial outcomes, necessitating appropriate risk mitigation strategies.
Furthermore, withdrawal amounts need not remain static throughout retirement. Expenditure generally tends to peak in the initial years due to increased travel and leisure activities, and may subsequently decrease in later stages of life.
A retirement strategy is not solely determined by age, it also incorporates factors such as spending requirements, health considerations, and family obligations. For individuals prioritising mortgage repayment, retirement savings may consist of assets with flexible liquidity options. If leaving a legacy is an objective, savings may include less liquid, longer-term assets intended for capital growth.
Effective planning requires adaptability and early maximisation of the investment portfolio. As retirement approaches, it is advisable to begin considering withdrawal strategies while taking into account relevant factors such as prevailing market conditions and individual lifestyle needs.
A longer life should be something to look forward to, not fear. We have an opportunity now to create the conditions to live longer, more fulfilling retirements.
Our research found that those who had taken steps to plan for retirement, such as preparing a budget or identifying potential income streams, felt significantly more ready for life after work across each of these measures. When finances are secure, people can invest in their health, maintain social connections, and approach retirement with confidence.
The writer is head of Southeast Asia and country head of Singapore, Fidelity International
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