UBS Wealth Management warns of the importance of savings in a world where people will live to be 100 years old

As living to 100 has become the new norm, a new report published by Chief Investment Office from UBS Global Wealth Management explores what it takes to be financially prepared not just to live long, but to live well.

According to the report, life expectancy is increasing around the world thanks to advances in medical technology, and Swedish researchers believe that the average human life expectancy could increase to 120 years within a few decades, thanks to Artificial Intelligence (AI ).

AI, advancing medical technologies and healthier living support longer life expectancy. As living to 100 becomes the new norm, this article explores what it takes to be financially prepared to not only live long, but to live well.

This is because living longer implies the risk of a reduction in financial capital. That’s why the Swiss bank says that early longevity management can reduce the risk of lifestyle degradation after retirement, for the sake of capital preservation, avoid the forced sale of long-term investments and allow investors to achieve their goals. financial goals.

The traditional school of thought argues that the profitability of investments should at least keep pace with inflation. But when expenses are taken into account, the conclusion is that, in reality, a portfolio needs to earn at least two percentage points more than the cost of living to be able to last 50 years, or more, in retirement.

Are we ready to live to be 100?

Artificial Intelligence, advancing medical technologies and healthier living are supporting greater life expectancy around the world. In Singapore, for example, life expectancy today is 84.19 years – an increase from 84.07 years in 2023 and 83.93 years in 2022.

“What is perhaps most intriguing is recent research from a researcher in Sweden, which suggests that the average human life expectancy could reach between 100 and 120 years within 50 years or so, at least in developed countries. If true, it is undoubtedly good news. But a long life expectancy also raises the issue of financial preparedness and the risk of depletion of financial capital”, reads the report.

Early longevity management, however, can reduce the risk of post-retirement lifestyle declines, in favor of preserving capital and avoiding the forced sale of long-term investments, while allowing investors to fulfill their financial goals, warns UBS Global Wealth Management.

According to the UBS wealth manager, “most of us want to generate an investment return that at least matches inflation. In fact, even a small deficit can have significant negative effects in the long term. For example, a 2% deficit between investment return and inflation erodes the real value of a portfolio by 44% over a 30-year period.”

But, warns the manager, there are two gaps in this line of thinking. Firstly, official data shows that people with high incomes have historically endured a higher inflation rate than average inflation. This may be due to varying spending patterns as well as the high-income segment’s limited access to government subsidies.

Second, the study concludes that just satisfying inflation is not enough. When expenses are taken into account, a portfolio actually needs to earn a return greater than the cost of living.

“If we intend for our portfolio to last at least 50 years after retirement, this number could reach two percentage points”, says UBS.

“We recognize that the cost of living is a very personal experience,” adds the society.

“Lifestyle, preferences, educational choices – these are all factors that determine our spending patterns. Dining at a Michelin-starred restaurant would cost 11% more each year, while home-cooked meals could have been more economical. In fact, many wealthy investors have likely experienced personal increases in the cost of living that differ significantly from official inflation results, often in an upward direction. To this end, the starting point is to arrive at the estimated personal cost of living before determining the rate of return necessary to finance your lifestyle”, highlights the wealth manager.

How to extend the longevity of your investment portfolio?

UBS’s approach to wealth management incorporates Liquidity, Longevity and Legacy strategies. A higher rate of return ensures the Longevity pot lasts longer and reduces the risk of withdrawal from the Legacy pot.

Having more investable assets or lower annual expenses, all things being equal, helps to extend the longevity of the portfolio. In the study, reducing the expense rate from 3% ($300,000) to 2% ($200,000) per year increases the longevity of the portfolio by at least eight years.

Another measure is a lower cost of living. A lower cost of living would also increase the strength of a portfolio in retirement. In this study, reducing the cost of living from 5% to 4% increases the longevity of the portfolio by two years or more, at all levels of investment profitability profiles. The cost of living in this study refers to a personal experience that reflects lifestyle preferences, as opposed to a national inflation statistic. Retirees can take control of their personal cost of living by making informed decisions about their lifestyle choices.

Greater return on investment. The longevity of a portfolio is positively correlated with the profitability of investments. The study shows that, all else being equal, portfolio longevity improves with higher investment returns, regardless of one’s cost of living. The implication of this is therefore how investors can achieve the highest long-term annualized rate of return within their risk tolerance.