We will live to 100 – How can we afford it?

According to a blockbuster report, “We will live to 100 – How can we afford it?” from the World Economic Forum that crossed my desk not long ago, since the middle of the last century, life expectancy has been increasing rapidly. On average, it has been increasing by one year, every five years. Babies born today in 2017 can expect to live to over 100, or in other words, they will live to see the year 2117.

According to the report, while increased longevity is a positive step for individual and societal health and productivity, this change has a profound impact on the traditional make-up of our societies and the social protection systems that are designed to support us in our old age.

In Japan, which has one of the world’s most rapidly ageing populations, retirement can begin at 60. This could result in a retirement of over 45 years for those who will live to the current life expectancy of 107.

One obvious implication of living longer is that we are going to have to spend longer working. The expectation that retirement will start early-to mid-60s is likely to be a thing of the past, or a privilege of the very wealthy.

The report has identified several additional factors that are putting increasing strain on global retirement systems. One of them is long-term, low-growth environment. So, what does this mean?

Over the past 10 years, long-term investment returns have been significantly lower than historic averages. Equities have performed 3%-5% below historic averages and bond returns have typically been 1%-3% lower. Low rates have grown future liabilities, and at the same time investment returns have been lower than expected and unable to make up the growing pension shortfall. That is quite a statement but it is not my math.  

Other factors cited in the report which caught my attention are low levels of financial literacy and inadequate savings rates. Levels of financial literacy are very low around the world. Most people are not able to answer questions on basic financial concepts such as how interest and returns will compound over time, how inflation will impact savings, and the benefits of holding a broad selection of assets to diversify risks.

On inadequate savings rates, to support a reasonable level of income in retirement, 10%- 15% of an average annual salary needs to be saved. Individual savings rates in most countries are far lower today, the report pointed out.

It makes perfect sense in this limited space that the longer the investing time horizon the greater the potential for savings or wealth to grow. The main point then is to have savings rather than to spend today. However, this can be difficult especially for the current young generation.

No one can deny that living on the planet is expensive even for the rich and richer today. In this part of the world where I live and work, any Grabcar drivers will tell you that there have been significant increases in the cost of living. Many wage earners are struggling as their income remains stagnant regardless of what the aspiring politicians have been telling us.

The cost of living poses a big challenge especially the lower income group as they spend close to half of their income on items such as food. This makes it increasingly difficult for them in this income bracket to save as the cost of food has been increasing due to inflation.

Property prices are high in a number of desirable locations elsewhere such as London, Sydney, Melbourne, Vancouver, etc. High prices in the local property market have already pulled the dream of homeownership away from many first-time buyers. If you are not lucky enough to be living in your parents’ house, then at least a third of your money will go to your rent.

By living longer, we are much more likely to experience a series of investing cycles in our lifetimes. Having an understanding of the big picture and how these long-term market cycles play out is important as it positions us in a better perspective to benefit from them – minus our emotions reacting to the short-term ups and downs of the markets.

Our kids will tell us that with over billions of cell phones spanning the planet, sensational news headlines travel from one end of the world to the other in a blink of an eye. Here is a small sampling of worries. Geopolitical tensions are simmering, not least on the Korean peninsula, the seemingly unpredictable US President, the recent outcome of the UK election and others. Enough is enough!

Hardly anyone is predicting the end of the world, but it is likely that we will be living in a world of low or volatile asset returns for a considerable period of time. Give yourself more rooms to win. You need to re-examine traditional investment practices and harness the latest investment solutions as part of the risk or volatility management in order to preserve purchasing power and grow real wealth by compounding gains.

Albert Einstein is rumored to have called compound growth the most powerful force in the universe. Compound interest can significantly boost investment returns over the long term. While compounding is powerful and can help produce wealth over time, one of the keys to its success is to avoid major losses along the way. Yeah, attempting to predict a market crash is a fool’s errands.

No doubt, you will receive a wealth of ideas from your other sources and the financial media. I do not have much more to say, so I will close with this. The increasingly challenging economic and market conditions plus the inadequate financial systems that have been designed to meet our retirement needs means we need to think out of our cocoon to make our money works harder for us. You have to act in your own best interest.