You must determine how long you will live if you want to invest for your retirement portfolio. This portfolio is one into which you accumulate money through your working life to buy income-generating products at retirement to support post-retirement living. In this article, we discuss certain factors you must consider for determining your life expectancy.
Your estimate of life expectancy should be just right — not too conservative nor too aggressive. Why? A conservative estimate would assume you will live longer, say, 100. Such assumption would be valid if many in your family have lived long. Otherwise, assuming longer life has its consequences on current lifestyle. Suppose you start work at 22 and intend to retire at 60. You have 38 years of working life during which you will pursue life goals such as buying a house and funding your child’s education. You must also provide for over one year of retired life for every year you work! This could stress your current cash flows.
An aggressive estimate would assume you will live till, say, 75. That could not stress your current lifestyle but leads to longevity risk- the risk that you will outlive your investments post-retirement. So, how should you balance between an aggressive and a conservative estimate? Life expectancy is an average age an individual is likely to live, assuming the rates apply throughout the person’s remaining life. For instance, according to WHO, life expectancy in India in 2020 was 70.8. But the actual years an individual is likely to live can be more or less than 70.8. You need to adjust your life expectancy based on your lifestyle and genes. If your parents live past 80, there is a high probability that you will too. Determining life expectancy is easier said than done. You should, therefore, revise the estimated amount you need at retirement continually through working life to account for any change in lifestyle and health conditions.
You can determine the retirement corpus needed to buy a joint life annuity with return of purchase price to moderate the issue associated with life expectancy. This product from a life insurance firm pays you or spouse, whoever survives longer, through life. So, the impact of the error in estimating life expectancy can be moderated. Having accumulated the corpus, you can decide at retirement whether to buy an annuity or any other income-generating product that best fits post-retirement needs.
(The writer offers training programmes for individuals for managing their personal investments)