When health is a threat to wealth

Scary thought.

But even scarier is the advice I see being given under the ‘‘retirement planning’’ head of our financial lives. Most well-meaning and prudent planners across the world say that when we’re young and earning, we are in a position to take greater risk with our monies and hence our asset allocation should skew towards equities — instruments that provide a substantial jump in returns over less risky instruments like debt.

As we grow older and approach middle age, they say, we should begin the process of getting out of equities and entering debt. That’s because our risk-taking ability falls as we, among many other things, age. So, at 50 we should start embracing debt and go on doing so till at age 65, we retire. By then, all our money should be in ‘‘safe’’ instruments and we can live off the interest we get from it. While the primary argument in this case is correct, the advice has not been thought through.

The financial services industry needs to rethink the way it advises us on three counts. The first rethink looks at age risk. Suppose a zero-responsibility couple — that is, a couple with their own house in place, children settled and no other financial needs than supporting themselves — is used to a Rs 6 lakh per annum standard of living. Let’s say inflation stands at 5 per cent when the couple turns 65 and the risk-free rate of return at 6 per cent. So, the couple needs to invest Rs 1 crore in a 6 per cent instrument to fund Rs 6 lakh worth of annual expenses.

In year two, inflation would have raised the cost of maintaining the same standard of living to Rs 6.3 lakh — the 6 per cent investment return will be short by Rs 30,000. In the tenth year, this will support only half their expenses. Goodbye holidays, goodbye leisure. Else, start eating into capital.

Maybe, Rs 1 crore, therefore, is not enough. Doubling the savings target to Rs 2 crore will keep this couple funded. But to get there they would need to spend more time with equities during their working years, turning age-risk profiling on its head.

The second rethink involves studying one of the biggest hazards staring the industry in the face — longevity risk because of innovations in medical technology. The focus of much biomedical research today is to retard the process of ageing — regenerative medicine in the form of stem cells, genetic technology that discovers and neutralises pathological proteins, telomere biology and so on. The elderly will not only live longer but better. They will not be passive but intellectually active participants of society.

And affluent Indians will easily be able to access these technologies. So, not only will we live longer, the quality of our lives will be better and, therefore, we will spend more. The industry needs to be able to address this need today so we can finance our tomorrow.

The third rethink is the ability to look at the elderly as productive workers. Because we will support healthier bodies and sounder minds, the concept of ‘‘retirement age’’ will die. Of course, bureaucracies will continue to ‘‘retire’’ people at 65 if not 60, but they will continue to work. We can already see that happening — second careers that often begin at age 50 or even 60 often mushroom into financial lifelines for an increasing number of older people, as they turn their knowledge gathered across many companies over three decades into money inflows for the next decade or two. So the ‘‘accumulation stage’’ of our life will not end at 65 but perhaps at 75, even 80.

In a future where better health will become a threat to our wealth, can the current approach to financial planning last? In a future where we are likely to outlast the companies we work for, can the current approach to career planning last? The one thing that is almost certain to last longer is our healthier bodies and minds. We may live beyond 90, our children may cross a century, even 120.

Measuring up to and mitigating this risk is simultaneously the biggest challenge and the biggest opportunity the financial services industry faces today.