Investing for a 100-year life

A baby born in Europe or North America today is more likely than not to live to be 105 – this is the jaw-dropping conclusion of Lynda Gratton and Andrew Scott, authors of The 100-Year Life. With new treatments becoming available for obesity and cancer, longevity continues to increase, with implications for society, but also for individuals and the way they approach their finances.

Whether or not an average lifespan exceeding 100 years really becomes a reality, there is no doubt that Europe is already facing a profound demographic shift, with the proportion of people over 65 in the EU projected to rise from 21% in 2023 to 29% by 2050. Life expectancy at age 65 now exceeds 20 years, with people living far longer than they have ever done in the past.

Up to now, most people have worked off a basic financial template: they are in education, they work, and they retire. In a world of increasing longevity, this is likely to prove increasingly unrealistic, particularly as innovations such as artificial intelligence threaten seismic change in the workplace.

Goldman Sachs estimates that up to two-thirds of US occupations could be exposed to some degree of automation by AI. People will have to be far more flexible in their approach to the employment market, and pay attention to the implications for their finances.

Later retirement age

Retirement age is likely to be pushed further back. Whereas previous generations could expect to live for between 10 and 15 years after they stop work, today’s retirees are spending as long as 30 years in retirement. That is likely to prove unsustainable for governments, companies and individuals. In the UK, for example, the state pension cost £112.6 billion in the 2022-23 financial year, a £5.8-billion increase from the previous year. In 2023, France spent 13.4% of its GDP on pensions.

Some governments have been successful in deferring retirement age, or in co-opting citizens and companies to make larger pension contributions, but the burden of paying retirement incomes is becoming steadily larger year by year. Individuals will ultimately be obliged to become more self-reliant, which will entail retiring later, saving more and pushing companies to increase employer contributions, or accepting a reduced pension income.

With retirement becoming ever later, people may face the exhausting prospect of a career lasting 50 years or more.

With retirement becoming ever later, people may face the exhausting prospect of a career lasting 50 years or more. In reality, the world of work is set to change. Ongoing education, or taking time off in mid-life to retrain, may become more common.

Employees may take shorter-term breaks before returning to the workforce. Many people will work in a different way altogether – blending part-time employment with conducting their own business, or becoming digital nomads who work from different locations across the world.

Meanwhile, retirement is increasingly less likely to be a single point in time. As funding retirement becomes more demanding, people may be choosier about the careers they pick, and may be more inclined to work longer. They may take on consultancy work – perhaps for their previous full-time employer – or launch ‘silver starter’ businesses in later life, when they have the financial reserves, focus and experience to make a success of it.

Long-term savings

These shifts in working patterns and retirement outlook will affect how you invest through your life. In particular, it may become more important to build up sufficient savings and/or develop alternative sources of income to support periods where you may earn less, or need to retrain, or even enjoy a short-term temporary retirement from the working world. Your savings and investments may need to be more flexible.

Protection against inflation will also become more important. If you are investing over a longer period, the impact of inflation can be significant. Over 10 years, the real value of €20,000 in savings would fall to €16,400, assuming a 2% inflation rate, the European Central Bank’s target, and to €12,190 over 25 years. In other words, an investor might be able to cope with their retirement savings not keeping pace with inflation over a decade; over 30 years, it would put a significant dent in their standard of living.

That is likely to prompt many people to invest more money in the stock market for longer to harness the additional growth potential it provides. JPMorgan’s long- term capital market assumptions forecast that the long-term, inflation-adjusted return from cash is between 2% and 3%, while returns from global equity investments are between 7% and 8%.

Financial health is also tied to one’s physical health. Few things erode family fortunes more quickly than care home fees.

Financial health is also tied to one’s physical health. Few things erode family fortunes more quickly than care home fees. Luxembourg has the highest daily average cost for residential care in Europe at €305 per day, compared with €240 in Switzerland and €110 in France – Spain offers the cheapest option at an average of €55 per day. The potential cost of care in the last years of life also needs to be factored into financial planning.

Complex investment choices

When investing for a longer life, investors need to be wary of being too cautious. They need their money to grow as much as possible, and they have a long time to ride out stock market volatility. This is a real advantage that should allow them to consider investing in growth opportunities in higher-volatility sectors such as technology, smaller companies or emerging markets, alongside core holdings in global equities.

The extension of longevity also brings investment opportunities. People are familiar with hedging currency, or other risk exposure, but investing in sectors such as healthcare can provide its own hedge against longevity. Spending on healthcare will continue to rise across the globe as populations age. The OECD points out that people may be living longer, but their lives as they age may not be healthier – more than half of the 20 years or so they are likely to live beyond 65 will on average be impaired by chronic illnesses and disabilities.

There should be opportunities for financial services businesses to help people seeking to save more to support themselves in old age. For those who retire in good health, there is also a booming market in leisure activities suited to an older cohort – luxury travel, for example.

Rising longevity should be welcomed, but it comes with investment implications. It will disrupt traditional models of working life and earning, and investors will need to incorporate greater flexibility into managing their finances. However, the most important investing principles will not change: start early, invest as much as you can, don’t be too cautious, and be alert to inflation. That way, you can enjoy your 100-year life, if that’s what it is, with less financial stress.