Oran Hall | Increasing life expectancy a challenge for personal financial planning

As more people live longer, the question arises about how to fund and maintain the lifestyle people were used to in their pre-retirement years for their full retirement years. At the centre of this is the tension between rising costs and the declining value of income.

I find it very interesting that so many of the people I know, whether from Hanover in my early years or from the Corporate Area, are alive and in relatively good shape in their 80s and 90s. And a few have scored a century.

Their situations vary; some have a good standard of living. Not so for others. Some have gone abroad to live with their children. Some still live in Jamaica with their children in their own homes or in their children’s homes, or in care facilities, or by themselves as individuals or with their spouses, and some live in their own homes in the care of hired individuals paid by themselves or by their family.

Having, in their working years, earned widely varying incomes, how they live seems to reflect somewhat past earnings and living standards. The truth, though, is that even those who earned relatively well and lived reasonably well are not all able to maintain their life style, their financial resources not being sufficient to allow them to do so.

Generally, a long life is considered a blessing, but with people living longer, they must have the required means – savings, investments and a pension – to sustain their living expenses independently over their extended lives. With the retirement age being 65, people who live to 85, for example, must be able to fund their retirement of 20 years.

The real challenge, particularly for the retired, is how to continue buying the same amount of goods and services without compromising their financial situation when inflation is always a present danger. To keep up with rising prices, income must also increase, but while some people may be able to earn strongly, full-time or part-time, in the earlier retirement years, their ability to earn declines as they get older.

For those receiving a pension benefit, most times paid in the form of an annuity, which is a guaranteed monthly sum, purchasing power declines over time unless it is indexed to inflation.

Another way to keep up is to increase income from investments. With investment strategy being more conservative at this stage and focused on earning cash income, much depends on the level of returns on interest-earning securities in addition to other forms of income like rent, dividends, the investment and cash values of certain types of life insurance companies, which can be withdrawn, and the proceeds from surrendering life insurance policies. This should be done after seriously considering how this action is likely to affect named beneficiaries or the estate.

Savings, investments and pension income constitute the pool of retirement funds set up primarily to fund a person’s retirement and facilitate a life of financial independence. For such funds, the withdrawal rate is important; if the rate is too high, there is the real risk of the funds being depleted. What a disaster that would be.

Some people are able to reduce living expenses by opting to sell their residences and move into smaller and

less-costly accommodation or to move to an area where it costs less to live.

Apart from higher prices due to inflation, medical expenses tend to weigh more heavily on the budget as a person gets older and becomes more susceptible to a wider range of medical conditions and as the need for elder care services becomes more necessary.

The ability of people in the top tier of the age pyramid to prepare for a long retirement is limited, but people in younger age cohorts can prepare, using the following strategies:

• Use tax-efficient savings and investment strategies to boost returns and accelerate the growth of the retirement fund;

• Contribute the maximum allowed to registered pension funds to maximise the benefits from the tax-free contributions and tax-free returns on the invested funds;

• Diversify the investment portfolio to manage risk and maintain a balance between income generation and inflation protection;

• Adjust investment strategy to reflect the realities of the market;

• Plan for the unexpected – have an emergency fund;

• Review the portfolio periodically;

• Work full-time or part-time, if possible, after the end of the official working years;

• Allow tax-free savings and investment income on life insurance policies to accumulate;

• Secure critical illness insurance to provide a source of funding outside of employment income or pension income, savings and investments to meet the high expenses associated with certain medical conditions;

• Make a budget and stick to it;

• Engage in healthy lifestyle practices and have regular medical consultations; and

• Ensure that contributions to the National Insurance Scheme are paid and accounted for, for as limited as the benefits are, they do help.

Generally, people want to be independent. Even if ill-health comes during retirement – long or short – and takes some independence away, a state of financial independence can make life more tolerable over an extended period and help in the maintenance of self-worth and dignity.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com