What if you lived to 100 – or beyond? With life expectancy rates rapidly rising in the 21st century thanks to advances in healthcare and better living standards, the chances of celebrating our 100th birthdays have never been higher.
But the financial implications of living to 100 means that the concept of traditional retirement is fast disappearing, raising concerns that people won’t have enough money to fund their “twilight years”.
According to Andrew J. Scott, a professor of economics at the London Business School and co-author of The 100-Year Life – Living and Working in an Age of Longevity, today's state pensions and retirement funds are not enough for individuals to fund lengthier retirements.
“The conclusion is inevitable if you focus on the 100-year life – people will have to work longer,” Professor Scott told a Nasdaq Dubai-hosted webinar on The New Long Life: Financing a Longer Future.
However, he said it is difficult to estimate just how much a person would need in their retirement pot if they lived to 100 as it depends on a number of factors such as lifestyle, country of residence and how much they want to live on.
"In The 100-Year Life, we take the case of someone living to a 100 and who wants to retire at 65 on a pension worth 50 per cent of their final salary," he said. "We calculate they need to be saving 25 per cent every year if they want to do that. If they are only prepared to save 10 per cent a year, then they will need to work until their late 70s.
“This requires rethinking your life and your career in radical ways. You need to invest in a lot more than your finances if you want to live a 100-year life – you need to think of your health, your skills and purpose and, above all, your relationships.”
There are currently 703 million people in the world aged 65 or over and this figure is expected to double to more than 1.5 billion by 2050, the United Nations said in a 2019 report. According to the World Health Organisation, global average life expectancy increased by 5.5 years between 2000 and 2016 – the fastest rise since the 1960s.
While the current average retirement age around the world is 65, studies have found that 50 per cent of children born in rich countries during the 2000s are expected to live to more than 100 years, Professor Scott said.
“That is going to have pretty profound implications,” he added. “The pension industry as it is currently constructed cannot survive because we are not saving enough to cope with retirement at 60 and living to 70 at the moment.”
According to the Organisation of Economic Cooperation and Development's Pension Funds in Figures June 2020 report, the amount of assets in pension funds in 2019 grew by 13.9 per cent to $32.3 trillion on the back of strong investment returns. However, the OECD said the spread of Covid-19 and its knock-on effects on financial markets during the first quarter of this year have already reversed last year's gains.
“Early estimates suggest that pension fund assets at the end of Q1 2020 could have dropped to $29.8tn, down 8 per cent compared to end-2019,” the OECD said in the report.
Professor Scott said the downward trend in pension funds is set to continue, with many central banks around the world expected to keep benchmark interest rates at near zero per cent to stimulate economic growth even after the Covid-19 pandemic.
“This isn’t a problem that can be solved by investing smarter,” he said. “There aren’t secret, safe high-return investment opportunities out there. In fact, longevity seems to be contributing to lower rates of return,” he said.
“It’s hard to get away from the conclusion that if we live for longer, we need to work for longer. That suggests the need to ‘work smarter’ – thinking about a career of multiple stages, each with a different aim and purpose where you prepare and invest in your future self in ways other than just transferring money.”