How living longer changes how people invest

 

The reality is that, as people live longer, their built-up retirement funds fast become inadequate to support them in their later years. Sher thinks that with innovation and relevance, the situation can be turned to a fundamental positive.

Modern medicine practices, new drugs, and cutting edge healthcare technologies are continuously ushering in a new era of life expectancy. Researchers in laboratories and organisations across the world are exchanging insights that provide solutions for people to live longer than ever before.

These developments have contributed largely to a sharp rise in recent decades in the number of people living beyond 100 years. This, experts say, is expected to add up to nearly 1.5 billion people aged 65 and over, with 2.2 million of those being centenarians by 2050 worldwide.

This poses a burden, or an interesting challenge for retirement – as we have more and more people at the risk of outliving their retirement savings with, for example, a 47% to 55% increase in duration of retirement period. Among contributing factors, traditional approach to savings is the main driver of this deficit.

“While increasing life expectancy is a strong positive progress for humanity, it also leads to knock-on effects that pose challenges to retirement provision that are not easily overcome through traditional funding methods,” says Craig Sher, head of research and product development at Discovery Invest.

Avoiding inadequate savings

The reality is that, as people live longer, their built-up retirement funds fast become inadequate to support them in their later years. Sher thinks that with innovation and relevance, the situation can be turned to a fundamental positive. “Instead of viewing longevity as a retirement challenge, we should rather seek to harness its benefits and, in fact, make retirement more affordable as people live longer,” he explains.

Getting the solution right is significant as it would mean reversing negative effects on individuals, families, their communities and even on governments as they would have to increase their social care budgets to provide for retirees who have little to meet their needs.

Shared value approach to investing

Building positives out of such a complex societal and investment challenge requires a fundamental shift in approach. For Discovery Invest, shared value is the centre of our solutions. Shared value, essentially, is the business model of aligning company performance and success with the addressing of social needs, in this way clients, companies and society as a whole benefit together.

How Discovery Invest integrates shared value in its various solutions

Linked annuities

As opposed to traditional linked annuities where an individual takes all the risk and reward managing their withdrawals from a ‘pot of money’, Discovery Invest’s solution is more integrated in it's approach while it encourages conservative drawdowns. It is now becoming common knowledge that retirement funding for the additional life years requires conservative drawdowns, which in turn increase persistency. It is beneficial for individuals to maintain a lower drawdown level initially to ensure that their savings last – especially if they are healthy. Leading a healthy lifestyle is central to this approach to investment.

Sher explains that insights reveal that, “if companies can encourage lower drawdowns and, encourage people to be healthier, they will be able to enhance their profitability. Additionally, using a shared value approach, a portion of this enhanced profitability should be used to help ensure that the linked annuity is sustainable”.

Discovery’s Income Investment Integrator

The Discovery Linked Retirement Income Plan is also based on the shared value principle. Research and application of the Vitality model to investing shows that if individuals do what is best for themselves, in other words become healthier and maintain responsible drawdown levels, Discovery will, in turn, make more money. This extra profit is then used to help these same clients who are generating the surplus by giving them the higher income levels that they need to sustain their longer expected lifetimes.

While traditional linked annuities rely on charging additional structures or fees, the shared value approach is transformational because it aligns the investment company’s profitability with its clients. Sher says that, “this way, the company’s and the individual’s benefits are derived purely from people doing what is best for themselves – and confident that as they live longer, they will be adequately provided for”.

Nothing contained in this article should be construed as financial advice and is meant for information purposes only.

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