Last time out I talked about life and death. This time I’ll also be talking about life and death. But from a different perspective. Hopefully, it won’t be so morbid!
Today, I want to tell you about what I call the Double Whammy.
The Double Whammy
The Double Whammy is the troubling statistic that we are living longer but less healthy lives. To see this, let’s look at the data:
Over time, life expectancy continues to rise (albeit, at a slower rate). Now sitting at just over 79 years for men, and just under 83 years for women. However, and more concerningly, disability-free life expectancy (the years of life one can expect to live without a disability, chronic illness etc.) is falling. Down to 62.5 years for men and just over 62 years for women.
This leads to an increasing gap. The number of years a person will live with a disability now stands at 19 years for men, 21 years for women.
Implications of the Double Whammy
The Double Whammy has two double whammy implications of its own. The number of years people can save towards retirement and contribute taxes to society is falling. Whilst the number of years people need to live off those savings and the help they need from the state is increasing.
Perhaps most troubling of all is that a person born today will on average become ‘disabled’ at around age 62. They won’t be getting the state pension age until 70 (the increased future SPA). That gap is widening.
It appears commonly accepted however that to keep/make the state pension affordable in the future, further increases may be needed. Whilst it may seem somewhat amusing to expect folks like Major from Fawlty Towers staffing the local Tesco, deep down it feels somewhat insidious.
Blissfulness… I mean optimism
A confounding factor in dealing with this is our eternal optimism (obliviousness) as humans. We continually underestimate how long we will live. We also drastically underestimate our chances of becoming disabled or chronically ill. Much like I overestimate how many chocolate chip cookies I can eat whilst underestimating my propensity to throw up.
Many of us deal with the looming possibility of needing long-term care by doing the very sensible thing of completely ignoring it!
So how can we deal with all this?
For me, the most important bit of personal finance guidance is the simplest: start. Start saving, start investing. If you’re reading this and you ain’t investing, stop. Go and open a broker account (Stocks and Shares ISA) and start investing in index funds.
It’s common wisdom that saving from a young age is sensible. But there’s another reason it’s smart: you can’t bank on saving big sums of money in your peak years if those are suddenly cut short by disability. We know that we underestimate the odds of that happening.
A common refrain against saving early and saving hard is that “life is to be lived”. “There’ll always be a day to make it up”. “You can do the heavy lifting in your peak earning years.”
That is a load of b*llocks.
Royal London has done the math – get saving into your pension. And speaking as somebody who has lived their life with someone who is disabled, I implore you to never take for granted the benefits of being fit and healthy. The best-laid plans of mice and men gang aft agley.
Don’t dismiss guaranteed income for life
I’d also urge those in, or close to, retirement not to dismiss annuities. As I’ve written in the past (and if you want to listen to somebody sensible instead, read what the excellent Mark Meldon has said on the subject on Monevator), annuities offer the ability to permanently insure against longevity risk and long-term care risks.
I understand the arguments against annuities in terms of value for money. But an annuity need not be an ‘all or nothing’ call. Like in the dark days before FREEDOM! From my view, it’s important to see annuities as an insurance, and not an investment, product. You are buying peace of mind. For most people, that can be invaluable. [Don’t worry if you hate annuities/the insurance industry/giving up capital, I’m not advocating forcing people to buy annuities. But I feel they should be part of any serious decumulation planning rather than dismissed out of hand.]
What about Financial Independence?
We also need to deal with the elephant in the room. What does this all mean for the FIRE movement?
On the face of it, I’d say it’s a strong critique of ‘the movement’. We’re likely to live for longer than we think and we’re likely to be less healthy during that time than we think. Ergo, we will underestimate how much we need to save and how expensive life will be. The response to that is: yes! The solution is more difficult. We don’t know, and can never know, what the future holds.
Taking myself as an example, I’m expected to live another 50+ years. There’s no reliable analysis that can tell me whether I’ve got enough money to live on for the rest of my life. Safe Withdrawal Rate analyses only tend to go for a maximum of 40 year retirements. Even then, the data gets well dodge when we start having to rely on pre-80s market data (‘well dodge’ is a well-established technical scientific term by the way). Likewise, I might live another 100 years or I might die tomorrow (hopefully not).
I’ll never know whether ‘enough’ was really ‘enough’.
That’s part of the deal with FIRE though. You lose some ‘closure’ and in exchange get some ‘freedom’. FIRE is definitely not for those looking to have both. I suspect for most people they value more certainty.
Bringing it full circle
In a way this brings us back to the start. When I talk to people about finances I often hear people talk about how long they expect to live. I rarely hear about what life they expect to live. We can see in the data that these two concepts do not follow one another. Alarmingly, they look like they are uncoupling (consciously or not).
Trying to seek closure and certainty in a world of increasing rates of Type 2 Diabetes, Dementia and other chronic illnesses is not possible. Financial planning conversations need to account for the fact that life isn’t binary. It is rare to be healthy then suddenly die (it’s also bloody sad).
But this need not end on a negative note. Because with good financial (and life) planning we can protect ourselves a great deal against life’s misfortunes and get peace of mind. By taking control of our health we can actively live a more healthy life.
In a future post, I’ll have a look at how we can use annuities and other insurance products to create a safety net in retirement.
For now, all the best,
Young FI Guy
Data sourced from the Office for National Statistics: https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/bulletins/healthstatelifeexpectanciesuk/2014to2016
A word on Disability-Free Life Expectancy (DFLE): this “estimates lifetime free from a limiting persistent illness or disability. This is based upon a self-rated assessment of how health conditions and illnesses limit an individual’s ability to carry out day-to-day activities.” The ONS also produces a second measure of life quality called Healthy Life Expectancy (HLE) which “estimates lifetime spent in “Very good” or “Good” health, is based on how individuals perceive their general health.” These are survey-based estimates, so they show some noise.
If you’re still reading this: 1. Why? 2. You might realise then that I’ve been very naughty in my charts my implying you can compare say 2013-2015 with 2014-2016. Which you shouldn’t as survey respondents from 2014 and 2015 are contained in both datasets. Instead, the best we can do is observe the trend over time. Since an improvement in methodology in 2009-11, the trend has been downwards for DFLE and a stall for HLE. The estimates prior to 2009-11 showed an increase in both DFLE and HLE, though to a lower extent than Life Expectancy. As such, the trend over time has been for a growing length of time for both unhealthy and disabled lifespans. A growing proportion of life is being spent in an ‘unhealthy’ life.
A final word. There are huge variations between countries (i.e. England vs Scotland) and between areas (i.e. London vs North East). The aggregated data hides lots of very interesting stories that you can read in the ONS summary above.
If you’re really bored here’s the link to the spreadsheet I used to create the charts above: https://drive.google.com/open?id=1gi7unt7BQ9QxkudPar3kSy8dufB-vx9IS7kw-nbDo8M