How to prepare for a 100-year life that is not in the future; it’s happening today
There are now more than half a million people living over the age of 100 or older living in the world, according to figures of the World Economic Forum. Every generation is living three years longer than the previous generation. The aging world population is presenting challenges to most of the developed world and in South Africa it is often associated with health-related issues. So, if we are all becoming older and reaching 100 is becoming more of a reality – consider how many of our grannies are now reaching a ripe old age of 90 and more – how should we make sure that our wealth lasts until that magic number? Wealth Migrate Chief Marketing Officer, Mariken Jansen van Vuuren, who has researched life until we clock a century, says, “living longer means you need to invest earlier” and for younger people it could start with not buying two lattes a day. Riaan van der Vyfer, Chief Investment Officer of the company, says it is going to take a new mindset and that retirement should not be the end goal of financial plans. Van den Vyfer also believes there is a structural problem in the financial services industry – Linda van Tilburg
Excerpts from the interview with Mariken Jansen van Vuuren and Riaan van der Vyfer
It’s overs for the three-stage life, hello to the full-stage life – Jansen van Vuuren
The 100-year life is not really a new concept. It is a book that’s been written by Andrew Scott and Lynda Gratton, and the entire narrative is that people are living longer. The 100-year life is no longer a concept, it has become a reality. I can say in my personal life where my one grandma passed away at 86 and the other grandma is 86 at the moment and she’s still going very strong. A close friend’s grandmother just turned 100 and a woman that lives in the village next to me turned 105 last year. So, the concept is that every generation is living three years longer than the previous generation, and we have more time and more information at our fingertips. But what do we do with that time and can our finances hold up? In the book, they speak a lot about a three-stage life, which encapsulates a linear economy of going to school, getting an education, and going to work. You probably hold one job during your lifetime and then you retire. We took a different approach because we do think the hundred-year life and living longer lives is really impacting our finances as well, and how we think about finances and financial literacy.
We like to refer to it as a full stage life where you get an education and think about your finances. In the old economy, you would maybe have got a subsidy for a car, maybe living expenses, and you would even get in a retirement fund as part of your working package. Then you retired at 65 and you didn’t really think about outliving your assets. But what we’re seeing with the new economy is that it’s turned on to its head quite severely. Over the past 100 years, we’ve experienced four industrial revolutions. The fourth industrial revolution is the one that we’re currently going through, which is driverless cars, smart robotics: the things we read in fantasy books have become our reality. The fifth industrial revolution that’s knocking on our door is new and emerging technologies, with fast application in the field of imaging electronics, cosmetics, textiles and so forth.
Retirement is not the end goal of financial planning, it is an event – Van der Vyfer
The biggest impact of a 100 life is that people and investors need to change their mindset. Retirement is not the end goal of my financial plan. It is an event. My financial plan needs to go up until death. Although we cannot put a date there; that is the end goal of my financial plan. It is not my retirement, I think that’s a key point. The next thing that I just want to bring into context, perhaps, when we talk about a retirement fund is that especially in South Africa, and also globally, we have something called the defined benefit fund. What that means was if I had a number of years of service with my employer, my employer had to pay me a monthly pension from the balance sheet up until I passed away. So in other words, the responsibility of retirement was vested with my employer. Now, what has happened is that we’ve got what we call defined contribution funds, where the risk of retirement planning – and this makes the topic of a 100-year life so much more topical – is that I take responsibility for my retirement. My employer makes a contribution, I make a contribution, but when I leave the service, I get a lump sum and I need to invest my lump sum to ensure that my money lasts. I think it’s that structural shift in the retirement provision that means we need to look at our finances differently.
Only 17% of people in America are saving for retirement and more than a third of middle-aged South Africans indicated that they were not saving any of their salary for retirement. – Jansen van Vuuren
I don’t think that’s a new thing. I think it has always been shockingly low. I think as much as the financial industry has changed, bringing us fintech solutions to really be able to take control of our finances, our behaviour hasn’t changed. Our financial literacy hasn’t changed. We don’t talk openly about finances; we don’t tell our stories. In many cultures it’s still considered a taboo subject and I think until that changes we won’t be able to take control of our finances. We have more information at our fingertips than we’ve ever had before. We don’t even know how to utilise it or we don’t use it correctly.
Only 20-30% of people can retire financially independent – Van der Vyfer
We’ve seen the stats, so let’s give a range. Only 20-30% of people can retire financially independent. So, first of all, you’ve got people not saving and people with money in the bank have this false impression that they’ve got enough, which is definitely not the case. Also, what I think is quite important, people tend to build passive income the hard way or they think they can only build passive income through a range of residential properties. Then they say, oh my goodness, it’s costing a million, one and a half million, 2 million. I cannot afford it. Whereas through technology, through as little as $10 in an investment, you can build a passive income. So, I think that’s where people are making the mistake. I need a lot of money to be able to generate passive income. The key point here is the sooner you start, the more investments you make, the sooner you build up this passive income. I think that’s part of what we’re trying to say, is just make a start and start building a diversified portfolio. With that, we mean, very important; it’s not equities, bonds and cash. Bring in things like commercial real estate, things like structured notes, things like solar panel investing that your portfolio becomes weatherproof, if I can put it like that, that it doesn’t behave the same in the same market conditions. So it’s more, first of all, understanding, I need to do something as quickly as possible. Secondly, let’s talk about money in our families, because if my child, for example, gets Anglo shares or an investment voucher for Christmas or if they achieve an A in a subject in school, suddenly it becomes natural, as an example. I think people need to think differently about how they approach investing.
Younger workers can start investing by skipping two lattes a day – Jansen van Vuuren
I actually want to mention an interesting stat – something that we’ve seen in our research is that most people who think they are hardly getting by and they don’t have enough to put away. They are people that are in their peak earning potential years. So, it’s very unlikely that they will have more money to put away at a later stage. I have a vast network of friends and we speak openly about our money and the one lady in our group actually said what she’s done is she cut down on two lattes a week, and every time her grandma put a R100 in her hand that went into the savings account, that went into an investment account and that’s how she started to build. So, I think we sometimes have this illusion that we do need a lot of money to start and that’s not always the case.
There is a structural problem in the financial service industry – Van der Vyfer
I also think there’s a structural problem in the financial services industry for smaller monthly recurring contributions. So, for example, you get quite a good choice if you can invest, for example, R1,000 to R2,000 a month. But at the moment, you want to do R500 a month or R250 a month; the problem is it’s very expensive and in terms of your investment portfolio, there is very little choice or it’s predominantly the portfolios of insurance companies. I think people then get disillusioned about their investment because it’s not behaving very well. I’m getting a return, but my net return is very low due to high costs and stuff like that. I think this is where the fourth and fifth industrial revolution and fintech solutions provide solutions because at lower amounts you get a wide range of choice at cost-effective investments and also non-mainstream investments which is what we are all advocating. I think that’s the challenge and why people do not always necessarily start early enough.
First of all, our biggest challenge is that we need to make financial advisors comfortable with the concept of using technology as part of their client’s financial plan. They should also venture into the space of global alternative assets, for example. So, I think that’s the first thing. The second point is that the older generation, they shouldn’t be too conservative. People think that I’m retired now; I cannot take risks or I shouldn’t take a risk. I’m not saying play Russian roulette yet, but you cannot put your money in the bank and think, first of all, it’s going to keep up with inflation and secondly, that my money will last. The younger generation talking about new options, new ways with their parents will definitely make a difference. But I do believe that the older generation still use the financial adviser and the financial adviser needs to take the responsibility here to equip themselves, get comfortable and introduce that in their financial plans with their clients.
If you resign, don’t take the money and go to Mauritius and other practical tips to prepare for a 100-year life.
I think the first key point is that retirement is not the end of your financial goal or plan. Think through the 100 years in terms of your financial planning. The second thing is a practical tip for assistance with a 100-year life is to preserve your savings. Practical examples – if you resign from your job, do not take that money and go to Mauritius. Take that money, reinvest it, do not withdraw it. Secondly, let’s say you’ve got a voluntary savings plan, if you get dividends reinvest that. Next thing is, we say we do not have enough money to save, remember it’s just going to take you three months. Then you have forgotten that you’ve got that bit of money in your budget and you just keep on ticking over. The last thing, a practical thing that I just want to mention, why it’s so important for people to start saving early is remember, at the end of your life, you’ve got a bigger accumulated amount of savings and you get this cumulative effect that you get return on return on return, and you accelerate your financial journey and that’s why it’s so key to start early.
Don’t panic about the 100-year life, just start today
I think the 100-year life is not something in our futures, it is happening already. and it’s going to continue to grow as health care grows, as life continues to evolve. Although retirement is a big thing that we need to bear in mind, life is not just about retirement. It’s about thriving throughout your life and that requires financial literacy and financial well-being. We need to start taking charge and accountability of our own finances and sometimes that can come in the form of a small investment that starts today, basically saying about one day or day one. And I think everyone should think of day one today. It needs to just start somewhere, just start even if you need to cut down on a latte, just start somewhere.
So as we know, like everything in life, the most difficult thing is the initial decision. Once you’ve made the decision, implementing that decision becomes easier. So, I would say the first thing is let’s make that decision. The fact that it’s too late, let me just start; make the decision. Secondly, get into discipline. A discipline could be something as simple as a monthly budget, because if you do your monthly budget, you get into the discipline of finance, of thinking finance or thinking money, and that makes it easier for you to actually carry through. The last thing to say for elderly people that say I’ve started too late; instead of not facing the reality and start drawing 10% of my retirement savings, go and say where I can save and decrease my withdrawals from my savings. So face that reality and then the next thing is, to not be too conservative. You definitely need to have a part of your portfolio to generate growth above inflation to top up income. The third thing is to be smart about your money. Don’t just put it into three or four balance funds but look at how to achieve the most return for the amount of risk being taken as you know by now, we advocate alternative assets as part of that portfolio, which becomes smart money. Then for anybody that says, you know what, this is not for me, perhaps, just think about one other practical thing apart from the 100-year life. What I’m experiencing is, these days is a change that parents start looking after children, it seems to me, at a later stage, which further complicates the 100-year-life, because there’s this extra liability and responsibility. So it’s not only about a 100-year life, but the other financial challenges on this longer journey. So be wise, be smart and start.