‘Financially Secure’ – What Does It Mean?

I often hear people saying that they don’t want to be rich; they just want to be financially secure. But what exactly does being financially secure mean?

I am sure that every person who has read an article or been to a presentation on retirement planning will have heard the following or similar statistics:
Of one hundred 45 year olds today, at age 65:
31% - Will have to continue working.
16% - Will depend on a state pension.
47% - Will depend on family.
6% - Will be financially secure or “well-off”.

Although the term financially secure is a subjective one based on individual needs, wants, risk tolerance levels and so forth and will thus probably have different meanings to different people, this article attempts to address the issue of what constitutes being ‘financially independent’ or ‘comfortably well-off’ in retirement.

There has been much press over the past decade concerning the new, longer-living, healthier generation that we are all a part of. Studies show that life expectancy has increased by between three to five years over the past two decades of the 20th century alone! People are living longer, suffering less disability and illness, great grandparentage is becoming common and a larger emphasis is being placed on healthier lifestyles. The question is raised, what affect does this have on the retiree? And the answer, in a nutshell, is that the impact is quite an important one, which if not considered when doing initial retirement planning, may have a somewhat disastrous impact on a future pensioner.

The industry has seen a shift away from what are known as ‘defined benefit’ pension schemes to ‘defined contribution’ pension schemes. Basically, a defined benefit scheme pays a pre-defined pension to the member, based on years of service, until death. The liability and risk therefore vests with the scheme. A defined contribution scheme pays a member a pension based on contributions made during the term of service, namely, whatever the pensioner puts in, he or she will get out (after taking into account underlying investment performance, of course). The liability and risk of this scheme vests with the member.

Besides the fact that people are living for longer, the point is that they also have to take responsibility for their personal retirement planning in order to ensure that whatever they do get out of their defined contribution scheme at retirement, is enough to last them for the rest of their lives.

When planning one’s retirement, financial calculators and needs analysis software tools currently use average life expectancies of 78 for men and 83 for women. Does this mean that a successful retirement plan should give one just enough capital to plan his 78th birthday party or her 83rd birthday party? The answer is obviously “no”, although the frightening thing is that this is exactly how many retirement plans are still being drawn up! Were this to be the case, it would mean that any years that the pensioner lives in excess of life expectancy used when doing their initial retirement planning would be income-free and would certainly take the shine off the remainder of the so-called golden years!

This brings me back to my initial question. What constitutes being financially secure? I believe that being financially secure means having enough wealth to generate a retirement income, increasing in line with inflation, that will ensure the continuity of one’s life prior to retirement (maintain living standards), without eroding one’s capital base. This strategy eliminates the threat of longevity and instead embraces it as it involves growing the underlying investment in order for it to provide for the growing income. So when people say they don’t want to be rich, they just want to be secure, it is highly likely that they will require far greater capital than they had anticipated.

Successful retirement planning should not be a function of longevity, but rather a function of continuity. No one really knows how long he or she will live, what matters is that you are able to secure an income that will grow with inflation for an indefinite period of time. At current inflation levels, one’s income will halve every 15 years. With people retiring for longer than 30 years these days, this means that incomes will have to double twice during retirement! Our challenge as aspiring retirees is to accumulate assets over our life times that will provide such an income. To ensure that you are able to be financially secure into retirement you should contact a qualified NFB financial advisor for assistance.