Financial freedom: Your Protection Against Longevity

You are going to live longer (on average) than your parents because the Straits Times says so. The Department of Statistics says so and so does our beloved gahmen. What do you think? Do you think you can hit 78 for a male or 82.8 for a female?

Coincidentally, the National Longevity Insurance Committee has also submitted its report to the gahmen for the hotly debated annuity scheme now renamed to a more palatable term "Longevity Insurance".

Why are these two articles being mentioned in this post?

Longevity can be a blessing or a curse

The fact that on average, we live longer than our parents has serious implications for us in terms of financial freedom. Looking at the positive aspects, living longer means that you have more time for the compounding effect of interest to allow your investments to grow. The flip side is that uncontrolled debt will bury you before you can clear it before your time on this earth is up.

Living longer can be viewed in a positive light if we are healthy. One of the reasons I promote healthy living as part of financial freedom is that without health, our new found status of being financially free is totally wasted as we enjoy not the fruits of our consistent living within our means, saving and investing as well as being prudent in conducting our financial affairs.

Giving the upward increase of healthcare costs, longevity without adequate health would be both a financial as well as emotional burden.

Assuming that we will reach the targeted age in reasonably good health, what should we consider in our plan for financial freedom if we are going to live longer?

Develop multiples sources of income

I believe even now more than ever that developing multiple sources of income as well as developing skills for a second career become even more critical as our life expectancies increase. This is because when you have multiple streams of income flowing, with adequate time and even if you are in your 40s, living to 78 means you have 38 more years to go. That is a lot of years given that companies can ask us to retire at 62 (now) and 67 in the future. Thus, if our dream is to reach financial freedom by 55, then we need to ensure that our passive income can sustain us for another 23 years i.e. 2 decades for us to enjoy the next 23 years doing all that we wanted to do without having to go to work.

Investing for the future

Our time horizon nowadays has to be far because on average we can expect to live until our 70s-80s. Unless you relish having to flip and serve burgers at 70, you have to give serious thought to growing your money now.

Remember the rule of 72 I talked about? In general, any investment doubles by 72/rate of return. So if you invest in treasury bills at 1.5% now, you treasury bill will double in 72/1.5 = 48 years. But if you invest in 1 lot of SPC now at $6.30 with a final dividend of $0.40 declared, that's a return of 6.3% which using the rule of 72 would double by 72/6.3 =11.4 years.

Imagine, shaving off 36+ years for a difference in return of 4.2%. That is what compound interest does for or against you.

Living within your means

If you believe the statistics and believe in what the gahmen says, then it only makes sense if you continue to live within your means NOW so that should your job stop before your heart does, then you are able to continue to fund your lifestyle through passive income from your investments or from the CPF plus CPF Life ('annuity') scheme.

Even as this post is written, news about the CPF Life aka ANNUITY scheme is being published on the Straits Times website as well as through Channelnewsasia. I will take a good look at what more schemes the gahmen dreams of making us responsible for funding our own retirement while GIC and Temasek invests our reserves in bailing out US/European banks hit by sub-prime.

Be well and prosper.