We are living longer than our previous generations. The average life expectancy of us Indians is around 69. (You can check it here yourself)
But that’s the average.
My guess is that life expectancy generally increases with income. At least to some extent. Reasons are fairly obvious. Higher-income ensures better living conditions, nutrition and healthcare. So having money helps if you wish to live longer.
But what I am trying to highlight in this post is the increase in our life expectancies.
Have a look at the chart below:
From the earlier average of mid-40s, the average life expectancy has now increased to late-60s. And assuming you are doing well financially, your life expectancy might easily be 75 to 80+.
So the length of post-retirement life is increasing with each passing year.
Of course we need to be thankful for that.
But we also need to be prepared for that. Chances of us running out of money before dying are higher than those of dying before your money gets over.
Till just a few decades back, retirement wasn’t something to be worried about. People didn’t live for very long after retirement anyhow. Then there were things like pension, large families (to depend on in retirement) and more importantly, lower lifestyle-related expenses (read how basic expenses are low).
But things are different now.
If you plan to retire at 60 and die on the very next day, then you don’t have to worry. You don’t even need to plan for your retirement. 🙂
But that is not going to happen.
Have a look at the grid below. The coloured cells tell you the number of years that you will survive after retirement, for various life expectancies.
So if let’s say you (plan to) retire at 50 and your life expectancy is 85, then you have 35 more years to live. And assuming you won’t earn anything actively, your retirement corpus should last those 35 years. That should be your aim.
For early retirees, the money should obviously last even longer. Of course there is another problem for early retirees – to find something to keep themselves busy in their retired life. But that’s another discussion altogether.
I was reading this interesting post by Ben Carlson where he talks about the
Four most important factors (or Pillars) of Retirement Savings as described in the book titled Falling Short:
The pillars help determine whether someone will have a large enough nest egg to cover their living expenses during retirement or not:
- Earnings – Higher the earnings, the smaller the proportion provided by Social Security and the higher our own required saving rate.
- Age when saving starts – The earlier we start saving, the lower the required rate of saving needed for any given retirement age.
- Age at retirement. The later we retire, the lower our required saving rate.
- Rate of return. The higher the rate of return on our investments, the lower our required saving rate.
Apart from these, I would also like to add that expenses play a major role. The less expenses you have today and assuming they would remain reasonable even in retirement, the less money you will need to save up for retirement. It’s simple. If you can control expenses, it means you can ‘easily’ save more and don’t need to arm-twist yourself to save more. And that is the secret of accelerating your financial freedom.
Just spend less and spend it… judiciously.
Now of these 4 so-called pillars, we have varying degrees of control over each one of them. You more or less control how much you can earn given your career choices. The age you retire is 60 for most people. Few adventurous ones (me included) try to take a shot at much lower retirement age (or better call it early retirement or financial independence). Returns that you get aren’t in your hand, but you can have a fair idea of the returns you will earn over long periods (here’s how).
But one thing that you can control is – the age when you begin saving for retirement seriously.
Starting to save money at an early age is one of the best things you can do to build your retirement corpus – which is your biggest financial goal. Irrespective of whether you know or acknowledge or not. And it is for very valid reasons that retirement planning is called nastiest financial goal.
It begins automatically (at a small level) with the mandatory savings that happen in your jobs (like EPF, etc.). But that’s generally not enough and you need to save more (read this). More so because many people make the mistake of withdrawing from PF corpuses when shifting jobs. That’s a sin when you consider compounding losses.
Here is a case study I did which clearly highlights the advantages of starting early: When investing for 10 years pays more than investing for 30 years.
Now coming back to the whole reality of having a longer non-earning retired life. A possible outcome of this increased life expectancy is that the investors will necessarily have to increase their equity exposure to ensure they keep up with inflation. If someone is not ready to invest more in equity, it means they will have to invest more in order to compensate for lower expected returns for non-equity assets.