Saving for retirement is typically an important goal all of us. In this article, we discuss life expectancy in relation to your retirement portfolio.

Longevity risk

Retirement portfolio is an accumulation portfolio. You save every month from post-tax monthly income during working life and build wealth to retire comfortably. The portfolio you create immediately upon retirement is called retirement income portfolio. This portfolio must generate income streams to fund your post-retirement lifestyle expenses.

You must start with life expectancy to determine the amount you require at retirement. The life expectancy number you find on the Internet is an average. That means, there is a strong possibility you will live past this reported life expectancy. Also note you must consider your parents’ life expectancy, as genetics play a vital important role in estimatingv life expectancy. If your parents live longer, chances are you will too. Often, individuals assume they will live till 82-85 years, considering their lifestyle and health condition.

Suppose you retire at 60. The amount you accumulate in retirement portfolio must be enough to buy investment products that can fund post-retirement expenses for you and spouse. What if you assume a life expectancy of 75 for determining the amount required at retirement? Then, chances are high you will run out of money during retirement. Note that there is a likelihood that you may live longer even if you reasonably estimate your life expectancy. The risk that you (or your spouse) will outlive your investments is called longevity risk.

Conclusion

You must balance longevity risk and current lifestyle expenses. So, you should not be very conservative in estimating life expectancy viz. you should not assume you will live till 100. You may have moderated longevity risk as there is a small chance many of us will live till 100. But this means you must save for 40 years of post-retirement living, assuming you retire at 60. Suppose you started working at 22.

During 38 years of working life, you not only have to save for intermediate life goals such as buying a house and funding children’s education but also provide for 40 years of estimated post-retirement expenses.

In addition, for every year you work, you must save for a year of estimated retirement expenses. That can be difficult to achieve.

(The author offers training programmes for individuals to manage their personal investments)

Published on December 23, 2024