Life expectancy has increased for South Africans over the last decade. The number of years we live with ill health has also increased. This could be bad news for your finances because it means you’ll need more money for a longer retirement and you could incur more health care expenses in those years. Let’s look at what that means for you and your financial planning
How long will we live? A female born in South Africa in 2016 can expect to live to 65, and a male to 59, according to the Global Burden of Disease 2016 study.
These numbers are averages, and many people live much longer than the average. If you reach age 65 how many more years could you live? The study found that women who reached age 65 in 2016 can expect to live another 18 years, men another 14 years (yes, women are living longer than men.)
Not all the extra years are lived in good health Many of us are living longer, but there’s another important statistic in the study. The number of years you are healthy is less than the number of years you can expect to live. So, a 65-year-old South African woman might live an average of another 18 years, but only 13 of those years will be healthy. The statistic is similar for men.
What does that mean for financial planning? The effect of living longer, and in poor health for much of that time, can be devastating on your finances, which means that careful financial planning is essential.
You could well end up in retirement for as many years as you worked.
Financial planning used to be easy: work and save for retirement, retire and spend what you have saved. When you worked for 40 years and lived another ten this was easy. Things have changed, and you could well end up in retirement for as many years as you worked, and incur more health care expenses.
We’ve identified three steps you can take to build a flexible financial plan that changes as your life changes, and helps you plan for these extra years and extra expenses.
Step 1: Identify your needs
The basic living expenses - food, transport, healthcare, plus a few extras like entertainment and travel - don’t change too much. What is significant is that you will need to cover those expenses for longer, as life expectancy increases, and there’s a chance of greater healthcare costs.
Step 2: Think about how you could meet those needs
Once you’ve identified your needs think about how you would meet them:
- If you are living longer you will need to save more for your golden years. Saving for retirement might seem daunting, but any extra amount you save can make a difference. Remember – because you are living longer your savings and investments will have longer to benefit from compound interest, which is where your money earns interest on interest. So, save as much as you can, as early as you can.
- Look for ways to earn extra income in retirement, for example running a small business or even starting a second career.
- Set up a special savings or investment account that you could use in retirement for medical costs or other unplanned retirement expenses.
Step 3: Put it all together in your financial plan
Your financial plan is your money management roadmap and allows you to control your finances.
It’s always a good idea to speak to your financial advisor about your financial plan. Financial advisors are skilled and experienced, and provide objective guidance and advice. When you meet, discuss issues around longevity and health, specifically, and make sure that your plan is adequate in this regard.
Top tip: Review your financial plan once a year and adapt it to future trends and expectations. You cannot put it on a shelf for 30 years and blow away the dust and hope it still works.
The bottom line Life changes, but we survive and thrive because we adapt. Think of your finances and financial plan in the same way. Be flexible and make your financial plan flexible. Plan, review, adapt and change. Get that right, and you will be able to live longer, and won’t be caught out by extra expenses later in life.