Weekend Reading: Planning for Longer Lives and Retirement
What caught my eye this week:
1. The Longevity Revolution
If you traveled back to 1900 and told people that by 2025 the average adult lifespan would increase by three decades, late Victorians would be amazed. Today, most high-income countries see average life expectancy exceeding 80 years. The UN World Population Prospects project global life expectancy rising from 72.8 years in 2019 to 77.2 by 2050.
Research cited in the IMF’s World Economic Outlook (April 2024) found that the average 70-year-old in 2022 had the same cognitive performance as a 53-year-old in 2000.
— IMF World Economic Outlook, 2024
That 30% cognitive gain translates into a substantial boost to human capital. Actuarial modelling indicates a 70-year-old’s discounted lifetime earnings can be 20–35% higher than estimates made two decades ago.
2. Retirement Age Trends in Europe
Thanks to rising life expectancy, several governments are pushing state pension ages higher. Denmark now plans a retirement age of 70 for cohorts born after 1970. In the UK, the state pension age will reach 67 by 2028 and is subject to another review in 2030.
- Denmark: Retirement age tied to periodically updated life tables, rising to 70 by 2035.
- UK: State pension age increasing from 66 to 67 by 2028; potential rise to 68 by mid-2030s.
- France & Germany: Gradual increases to 65–67 by 2030.
The fiscal rationale is clear: longer working lives help close the pension gap in public finances. But the social implications vary widely by income and occupation.
3. Financial Implications of Extended Working Lives
Journalist Andrew Oxlade argues that postponing full retirement isn’t necessarily negative. Maintaining employment at age 70 can yield average annual earnings up to 30% higher than previously aged peers, especially for knowledge-sector roles. However, lower-income workers in physically demanding jobs face disproportionate challenges.
A recent Oxford Economics study uses agent-based modelling to show that a 5-year delay in retirement age can improve a typical pension fund’s funded ratio by 10–15 percentage points, assuming contribution rates remain constant.
4. Planning for a 100-Year Life
Given these trends, investors and savers should:
- Stress-test expenses: Model retirement cash flows out to age 100 using Monte Carlo simulations.
- Diversify portfolios: Blend equities (50–60%), bonds (30–40%), and alternative assets (real estate, infrastructure) to mitigate sequence-of-returns risk.
- Build an “Optionality Fund”: A liquid Chasing Cows reserve equal to 2–3 years of living expenses to manage unexpected health or job events.
5. New Section: Demographic and Economic Modelling
Advanced demographic models now incorporate cohort life expectancy and health-adjusted life years (HALYs). By integrating these with macroeconomic variables—such as dependency ratios and labour force participation—economists forecast a 0.5–1.0 percentage-point annual increase in GDP per capita in high-income countries over the next two decades.
6. New Section: Investment Strategies for Extended Lifespans
Financial planners recommend a dynamic glide path approach:
- Pre-retirement (40–60 years old): Focus on growth assets—global equities, high-yield bonds, private equity.
- Early retirement (60–75): Transition to balanced allocations; target a 60/40 equity/fixed-income mix.
- Late retirement (75+): Emphasise income generation—inflation-linked bonds, dividend aristocrats, annuities.
Expert opinion from the Society of Actuaries suggests integrating longevity swaps in large pension plans to hedge longevity risk and stabilise liabilities.
7. New Section: Policy Outlook and Geopolitical Considerations
Rising retirement ages intersect with global trends in migration, urbanisation, and social welfare. In East Asia, ageing populations are prompting four-day work weeks and robotisation to support productivity. In contrast, some emerging markets with younger demographics are investing in education and technology to capture a demographic dividend.
Policymakers must balance fiscal sustainability with social equity. Progressive pension credits, means-tested top-ups, and flexible retirement pathways are under consideration in OECD discussions.
8. Conclusion: Seize the Opportunity
Longer, healthier lives are a triumph of medicine, nutrition, and technology. But they require smarter financial planning and policy innovation. Whether you’re building a “Chasing Cows fund” or adjusting asset allocations for a potential 30-year retirement, the goal is clear: Invest as if you’ll make it to 100.
Have a great weekend—and plan for longevity!