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Can You Afford to Live to 100?

Investment

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5.5.22 |

Become Wealth Editor

The hidden costs and reality of growing older

Imagine waking up on your hundredth birthday, surrounded by loved ones, healthy and happy. Sounds like a dream, right? Well, it's becoming more of a reality than ever before.

A century of life was once a milestone reserved for royalty or the exceptionally fortunate. But times are changing. Medical advancements, improved living conditions, and better nutrition have conspired to extend our lifespans dramatically.

But with increased longevity comes a new set of challenges, especially when it comes to your finances.

Gone are the days when retirement meant leisurely golf games and a cruise every year. Today, it's a marathon, not a sprint. And the finish line keeps moving.

The traditional model of working for a few decades, retiring, and having a workplace pension to complement the draw-down of savings and NZ Superannuation (“the pension”) is no longer sufficient. Financial planning now requires more careful analysis.

With the prospect of decades in retirement, the question becomes: can you afford to live to 100?

The Retirement Reality Check

When Otto von Bismarck launched the first state pension in Europe in the 1880s, only one percent of the German population lived to collect it. Qualification for payment was carefully set at 70, the founder of the world’s pioneering welfare state had done his sums and knew this wouldn’t cost much: because 99 percent of people didn’t live that long!

New Zealand was one of the first to follow suit, introducing an old-age pension in 1898.

Fast forward to modern-day New Zealand, and the number of people reaching the age of 100 has quadrupled over the past 30 years. It is likely to quadruple again by 2035.

New Zealand is facing a retirement reckoning. With a rapidly ageing population and a pension system designed for a much shorter lifespan, the question isn't if changes will come, but when, how, and what.

Including retirement and unemployment benefits, there are more Kiwis than ever receiving some form of social welfare. As a result, it will be considerably harder to resolve the complex financial challenges that rising longevity presents, not least of all the affordability to the taxpayer of sustaining NZ Superannuation (“the pension”), which is one of the most generous in the world.

This means we could see the retirement age increase and potential cuts to the superannuation amount.

These changes will undoubtedly impact the lives of future retirees, forcing many to rethink their retirement plans.

While it’s impossible to know precisely how long we’ll live, research shows:

‍Kiwis are living longer and life expectancy increases for each additional year we live.‍
Women tend to live longer than men.
There are disparities in life expectancy between the rich and poor. Life expectancy is reduced in lower socio-economic areas in New Zealand and in the early 2010s there was an eight-year life-expectancy gap for men and a six-year gap for women between the least and most deprived neighbourhoods.‍
Billionaires are investing in the quest for eternal life.

It’s undeniable that saving enough to sustain a comfortable lifestyle in retirement is becoming a formidable task, not helped by the rising cost of living.

Investment strategies need to be recalibrated to account for a longer retirement horizon and increased medical bills later in retirement. It’s little surprise the risk of outliving your savings is becoming a more pressing concern.

The Looming Financial Storm

Healthcare costs: As we age, the likelihood of chronic illnesses and medical needs increases exponentially. The costs associated with long-term care, medications, and medical treatments can quickly erode retirement savings. If you're receiving NZ Super or a Veteran's Pension and have a disability or health condition, you may qualify for additional financial support or government-funded services. You can find out more here.
Pension shortfalls: Traditional pension plans were designed for shorter lifespans. With people living longer, these plans are often inadequate to cover the extended retirement years.
Inflation: Until recently, many financial gurus thought inflation was tamed. But, the resurgence over recent years has threatened some long-held assumptions, as the nasty creep of inflation can significantly diminish the purchasing power of savings over time.
Cognitive decline: Conditions like dementia and Alzheimer's disease can necessitate costly care, placing a significant burden on finances and families.

Saving for the Century

The prospect of living several decades in retirement is forcing a radical rethink of financial planning.

This new reality demands a comprehensive investment strategy. It’s no longer just about accumulating wealth; it's about managing it wisely over an extended period.

Building a diversified portfolio that can withstand market fluctuations and inflation is crucial. This might involve a mix of:

Equities (“shares”): For long-term growth and dividend income, but with an understanding of the inherent risks.
Bonds: To provide stability and income, but mindful of interest rate risks.
Real Estate: As a potential hedge against inflation but considering property management and maintenance challenges. Owning rental properties can provide a steady income stream through rental payments. Additionally, property values can appreciate over time, offering potential capital gains.
Alternative Investments: Such as commodities such as gold, hedge funds, or private equity, for diversification, but only for those with higher risk profiles.

Let’s not forget about risk management, including:

Diversification: Spreading your investments across different asset classes can help reduce risk.
Emergency fund: Having a cash reserve can provide a safety net for unexpected expenses.
Rebalance: Beyond asset allocation, it's crucial to regularly rebalance your portfolio to maintain the desired asset mix. As investment goals and risk tolerance change over time, the portfolio composition may need adjustments.

Living Off Your Nest Egg

Once you've accumulated a nest egg, the challenge becomes generating a sustainable income stream throughout your retirement.

Here are some strategies to consider:

The 4% rule: A traditional rule suggests withdrawing 4% of your retirement savings in the first year of retirement, then adjusting for inflation each year thereafter. However, this approach may not be suitable for everyone, especially with longer lifespans and when to consider increased spending needs during the final phase of retirement due to medical treatments.
Phased retirement: Consider transitioning gradually from full-time work to part-time or consulting work. Part-time work can supplement retirement income while providing social interaction. It can be adjusted based on your health, interests, and financial needs. For example, if you’re a teacher you might decide to do relief teaching. If you’re a business owner or expert in your field, you might become a consultant or independent director.
NZ Superannuation: New Zealand provides universal superannuation for anyone over 65.
Reverse mortgages: This option allows homeowners to access a portion of their home equity as a loan. However, it's crucial to understand the risks and implications before considering this strategy.
Blending investment strategies: Carefully combining various investment approaches can create a robust retirement income plan.

The Become Wealth team has a range of modelling tools designed to create several life scenarios to help identify the most appropriate strategy for you in retirement.

The Psychological Toll

Beyond the financial challenges, the prospect of a century-long life can also weigh heavily on our mental wellbeing. Financial security, declining health, declining quality of life, and the potential for isolation can create anxiety and stress.

Overcoming Bias

Saving for a goal decades away can be challenging. Here are some psychological factors to consider:

Hyperbolic discounting: We tend to value immediate rewards more than future ones. Setting up automatic contributions can help overcome this bias.
Framing: Think about saving for retirement as 'investing in your future self' to make it feel more tangible and rewarding.
Goal Setting: Setting specific, measurable, achievable, relevant, and time-bound (SMART) goals can keep you motivated and on track.
Progress Tracking: Regularly monitoring your progress can provide a sense of accomplishment and fuel further saving efforts.

Related articles:

Harnessing Real Estate for Retirement Income

As we mentioned earlier, real estate can be a valuable asset in retirement, offering both income generation and potential for wealth growth. As many current retirees own property, it’s worth exploring some specific strategies you may be able to use to fund your retirement:

Downsizing to a Smaller Home

Downsizing to a smaller home can free up equity. This money can be invested to live from, invested to provide income, or used to pay off debts which will reduce outgoings. You could also opt to move somewhere with a lower cost of living, including council rates.

Rental Properties: Diversifying Your Income

Investing in rental properties can provide a steady income stream. However, it requires careful management, including tenant screening, property maintenance, and potential vacancies.

Oftentimes, investing in a property at-or-during retirement is undesirable as it can put all a retiree’s eggs in one basket, and leaves the retiree dependant on the property being seamlessly tenanted and without expensive maintenance issues that would interrupt the income the property provides (rent after subtracting all expenses). In comparison, a diversified portfolio can be a more sensible overall option, as disruption to any one asset in the portfolio should be offset by the performance of all the other portfolio assets.

Home-Sharing

You could rent out a spare room or basement apartment in your home to provide a steady income while offering companionship. However, careful tenant screening is essential as there could be security or other issues arise.

Alternatively, platforms like Airbnb and Vrbo allow homeowners to rent out rooms or entire properties for short-term stays. This can generate additional income, especially in popular tourist destinations over peak periods, like summer for a beach house.

Another option could be hosting international students. Many programs provide stipends and cover living expenses, though the suitability of this can vary depending on your circumstances.

Living with Family

Living with family can offer the mutual benefits of companionship, shared expenses, and childcare support. However, it's essential to approach this arrangement with clear expectations and open communication.

The Bottom Line: Rethink Your Retirement Plans

The dream of a century-long life, once a distant fantasy, is rapidly becoming a reality.

While this increased longevity is undoubtedly a positive development, it presents significant financial challenges. From the sustainability of government pension systems to the rising costs of healthcare, individuals face a complex landscape as they plan for their retirement.

The traditional retirement model is no longer sufficient. To secure a comfortable and dignified retirement, careful financial planning, diversified investment strategies, and a proactive approach to healthcare are essential.

While the future may seem uncertain, understanding the potential challenges and taking steps to mitigate them can help you feel more in control.

By addressing the challenges head-on and embracing innovative solutions, we can ensure that the golden years are truly golden for generations to come.