Scott Kingsley, Senior Wealth Advisor
In general, global life expectancy has been increasing gradually for decades. Aside from a dip as a consequence of Covid, the impact of enhanced healthcare, diet and lifestyles has been positive. This is even more evident in the Far East compared to the likes of Europe and the USA.
Today, global life expectancy stands at 72.27 years, while Hong Kong, Japan, Singapore and South Korea currently have life expectancy amongst men and women in excess of 80 years. By 2050 it is estimated there will be 1.3 billion people over the age of 60 across the Asia-Pacific. This equates to one in four people, although Hong Kong is expected to see even more rapid growth, with one in three expected to be over 60.
While this brings about many opportunities for businesses and services, there are also various challenges with regards to retirement finance and planning for the future.
It is useful to put this information into context to show the huge improvements in life expectancy across the APAC region. Some interesting facts about life expectancy:-
Moving to a slightly higher age bracket, we know that there has been a significant increase in the number of people aged 65+, as a percentage of the population, across various areas of Asia:-
This gives you an indication of the huge shift in demographics which will have a significant impact on:-
On an individual level, while there are obvious benefits to enhanced life expectancy, this means that your pension income may need to last a growing number of years.
Historically, there has been a common misconception that financial preparedness prior to retirement would be enough to see you through your later years. Even if historically this was correct, the continuing uptrend in life expectancy across the Asia-Pacific region is likely to place pressure on even the best managed retirement plans. Consequently, it is now important to appreciate post-retirement management of your funds as much as pre-retirement financial strategies.
We will now take a look at the various factors to take into consideration when planning for life in retirement:-
Financial goals
As with any financial strategy, your financial goals are not set in stone and they will most certainly change over the years. However, they act as a useful guiding path, with various targets along the way, to ensure that you are making progress. Your financial circumstances can change for a whole host of reasons, such as an extended family, cash flow difficulties, increased employment income, enhanced investment returns, etc. It is important to keep your financial goals up-to-date and realistic.
Many people tend to begin with a relatively high risk tolerance in their early years, which is continually reduced until you approach retirement. At this point, there is a tendency to go for less risky investments as a means of ensuring some form of liquidity and steady income in later years. The truth is that we all have a varied attitude to risk and different financial backgrounds. Therefore, it is important to take the advice of a financial expert. However, without an element of capital growth, it may be difficult to stretch your retirement funding through to your passing.
As we alluded to earlier, there is a natural tendency to reduce your investment activity, and even the level of advice sought, as you approach and move into retirement. In the modern day it is important that you continue to take professional financial advice in retirement and look to maximise returns on your assets to secure future income. It is vital you find a balance between capital appreciation and peace of mind. For example, you may allocate part of your funds to a guaranteed income product and the balance towards long-term capital appreciation.
In a similar fashion to risk tolerance, you are likely to see a significant change in your asset allocation as you move towards retirement. A tendency to move towards less volatile/liquid assets should again be considered in light of extended life expectancy. If your funds have limited potential for capital growth in the long-term, are you certain they will last the rest of your life?
Steady controlled inflation is helpful, while ultra-inflation or negative inflation can decimate an economy; it’s as simple as that. Controlled inflation encourages economic growth, wage inflation and manageable price increases for products and services - the perfect scenario for positive stock-market performance. Since 1950, the average recession has lasted 10 months, while the average period of economic growth is 69 months. Consequently, in the longer term, stock markets have tended to outperform inflation by a significant margin. However, there are risks and this is not guaranteed.
In the past, when interest rates were relatively steady, you could factor in an element of income from funds held on deposit. Depending on the size of funds held on deposit, this could result in useful cash flow in retirement. The situation has changed dramatically over the last 15 years, from the 2008 US subprime mortgage market crisis to the current day. An extended period of historically low interest rate saw the relative spending power of funds held on deposit fall dramatically. However, over the last 18 months we have seen a significant increase in global interest rates and they may not yet have peaked.
As we live longer it is likely that we will encounter various illnesses and ailments along the way - otherwise known as the ageing process! Consequently, it may be sensible to look at healthcare insurance as a means of limiting any financial liability for yourself and your family. Life insurance may also be an option in your retirement planning, a means of providing financial security for your loved ones.
In the past, there was a degree of family support for older relatives, but in many countries, this culture is not as strong as it used to be. Therefore, where once you may have been able to rely on younger family members for assistance, this may not be the case going forward.
It is important to take professional financial advice when it comes to retirement planning in order to incorporate the broader picture into your plans. For example, the use of tax allowances and tax efficient investment vehicles may seem methodical year-on-year, but the cumulative impact can be significant.
Alternatively, one trend which has begun to emerge on a global basis, not just the Far East, is the extended working life of men and women. Where economies are growing at a faster rate than the workforce, this has led to demands for more experienced workers. This could have a marked impact on income in later life and retirement plans.
Extending your working life may not be the perfect scenario, but it will help counter the ever-increasing cost of living.
There have been many surveys over the years looking into the thoughts of those living in the Asia-Pacific in relation to risk, retirement and general investments. There is a significant discrepancy between the focus and the attitudes of men and women in relation to investment, retirement and general finances:-
There are a number of reasons for these gender variations such as:-
It is important to note that women tend to live longer than men with the age difference as much as 10% and sometimes beyond. Therefore it is encouraging to see more women take an active approach to their personal finances with one eye on the future and retirement.
While an ageing population can have significant benefits for an economy going forward, on a personal basis, it can place pressure on current and future funds. The trend in extended working lives is not unique to the Far East, with evidence on a global basis. Planning is the key, adjusting your investment strategy as your scenario changes, as well as improving overall financial literacy.
An element of financial independence will encourage individuals to ask questions and approach financial advisers for critical advice. This is the key to long-term financial security and thankfully an area in which there has been significant progress.
If you require advice about retirement planning or you would like to discuss your finances in more detail, please contact me.