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Among the vociferous disagreements over where to have our Christmas lunch and who owes the others the first round at the pub, there is one issue of extreme contention in my team: the accuracy – or otherwise – of the claim that the first person to live to 150 years has already been born. This fact is, by its very nature, unprovable as scientific studies can estimate the life expectancy of babies born today, but it can not confirm a lifespan with certainty.
And while I agree with those who take this particular factoid with a healthy pinch of salt, the sentiment behind it is true. People are living longer lives thanks to advances in medicine and changing lifestyles. Gone are the days when one might have had to worry about being stepped on by a woolly mammoth, run over by a horse-drawn carriage or catching the bubonic plague from a neighbour’s sneeze.
This week’s chart shows that over the past several decades, the life expectancy in the UK has risen, across the nation and for all constituent countries.
According to the Office of National Statistics currently, life expectancy for a British male is 79.1 years and 82.2 for females.In fact, our analysis shows that Britons who are currently 65 years of age are more likely than not to reach 80. And for couples, the probability of at least one of the pair reaching 80 is almost a certainty, at 94 per cent. Meanwhile, a 65-year-old couple might be surprised to learn that there is a greater than 50 per cent chance that at least one of them will live another 25 years, reaching the age of 90.
These probabilities underpin the first principle of the six principles we will be discussing: life expectancy and pension shortfall. If the timelines and checkpoints in life shifted to match this longer anticipated lifespan, this would not be so much of an issue.
But this matters for retirement and financial planning for the later years, in which we do not expect steady incomes. An HSBC study, The Future of Retirement, explains that people’s expected retirement age shows little sign of changing, despite longer lifespans. On average, the next generation of retirees expects to retire at age 59, identical to the actual retirement age of their parent’s generation. So if we are living longer but retiring at the same age, having a financial plan for those “extra” retired years is absolutely critical.
The startling fact is that people expect their savings to run out during their retirement. The global average of number years that savings are expected to last is 10 years, which leaves eight years of retired life unfunded. The numbers for the UK are seven years of savings expected and 12 years of shortfall.
And institutions do not fare much better. Despite strong asset returns and high levels of cash contributions thus far, low interest rates and low future expected returns in the traditional core assets markets have caused a decline in funding ratios. Research by MSCI indicates that the UK’s defined benefit sector has the weakest funding position in Europe, throwing the importance of personal contributions into even sharper relief.
Being aware of the gap is the first step, and it is a great intuitive place to start with clients. Investing is more than just a hobby or way to make a little extra spending money; it is absolutely vital in the current environment. Starting early, being active, disciplined and diversified are the next principles that we will cover in the coming weeks.
Longer life expectancy may be good news, but it is good news tempered with some important considerations. It remains to be seen whether there is a baby out there somewhere who will be the first to reach 150. But in the meantime, let us all spare a thought for those parents who, deep in the throes of newborn-induced sleep deprivation, may be wondering if it’s theirs.
Nandini Ramakrishnan is global market strategist of JP Morgan Asset Management
