This seemed unlikely until I did some research on the validity of that statement.
The below graph illustrates how life expectancy increased from the age of 48 to 78 (a 54.17% increase) between 1900 and 2000, due to advancements in medical procedures and medication.
(Source: ValueofInnovation.org)
With innovation and technology, more advanced medical procedures and pharmaceuticals will continue to prolong our lifespans. Assuming the scientists are correct, this impacts the retirement planning process significantly.
The accepted norm in society is that a person will start attending school from the age of six and continue their education until around the age of 21 or 22, after completing a University qualification. They will then work until the age of 65 and hopefully throughout their working career, they would have saved up enough capital to live off until their death.
At present, if a person starts working at the age of 21, they would receive approximately 528 salary slips before they stop working. In reality, the percentage of income saved per month is not always sufficient and not all 528 salary slips will be used to invest toward retirement.
This problem is exacerbated the longer a person is expected to live. Allan Gray has reported that 70% of their clients who receive a pension deplete their funds before death. This is a very alarming statistic.
If human born today can be expected to live until the age of 200, then their pension will have to last a longer period of time.
If we assume that humans born already are capable of living until the age of 100, then they will have to make provision for capital to last 35 years if they retire when they are 65 years old. If the life expectancy is 200 years for humans born today, then the same assumption can be applied, however, the capital has to last 70 years if the person retires when they are 130 years old.
We do not know how humans will age when they are celebrating triple digits as we have so few humans that have lived that long. A 200-year life span is a long time.
The burning question is: would I really want to work from the age of 21 to the age of 130? That is 109 years of earning an income before I retire.
This is why I strongly believe in financial freedom.
Financial freedom is retiring at your own time and not having to worry about running out of capital.
With investments where funds have to grow with compound interest, you are reliant on time to build up enough capital, which is why the ‘normal’ retirement age is seen to be the age of 65. The reason is due to the time needed to build up enough capital through compound interest. If a person born today has to have even more capital to make provisions for future income requirements.
For example, an income of R50 000 in 2018 increased at inflation of 6% per annum, it will be R97 438 936 in 130 years’ time in the year 2148. If we assume this is the future ‘normal’ age of retirement, the equivalent income will be R97 438 936 to have the same buying power of R50 000 today. Now you can imagine how much capital needs to be invested in order to produce that future income and potentially to last for a period of 70 years.
With investment property, the rental income keeps up with inflation. This means you can keep track of your cash flow on an annual basis. If you are receiving R50 000 per month in rental income today and it escalates at 6% per annum, then it will be generating R97 438 936 per month in 130 years’ time.
I have used this example to explain the concept of income trajectory and how an investor can benefit from having a plan in place to track their current investment portfolio.
Rental income will always be generated if there is a tenant in the property, so the risk of running out of funds is reduced. And the more properties you have in your portfolio, the greater the buffer which will reduce the impact of not receiving rental income in one particular unit.
Sean Johnston, CFP®
General Manager: Property Portfolio Planning.
Sean is the Head of Property Portfolio Planning, overseeing all the investment plans and advice provided to investors. Sean is a Certified Financial Planner® registered with the Financial Services Board (FSB) as well as the Estate Affairs Agency Board (EAAB). In addition, he is a member of the Fiduciary Institute of South Africa (FISA) and Financial Planning Institute of South Africa (FPI).
If structured correctly, the properties will continue to generate an income for generations to come. This essentially means that that level of financial freedom is maintained beyond your lifespan and the next recipients of this rental income will not have to work for a period of 109 years.
If you fail to plan, you plan to fail in achieving financial freedom.
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