How to plan for longevity risk in retirement?

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I put up this tweet thread in March 2020. The tweet was about the passing away of a freedom fighter, journalist, and scholar. He was 121 years old when he passed away. When I thought about his age, my initial thoughts were all about the kind of lifestyle he would have led for having been blessed with such a long life. The usual set of things occurred to me: he must have led a disciplined life, gone to bed early, risen early, eaten right, avoided junk food and addictions, exercised regularly—even if it meant just walking—and maintained a healthy and positive mind.

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Quite naturally, my thoughts further drifted to what I, as an individual, can do to incorporate such habits into my life. While thinking through all the lifestyle changes and everything else around it, I suddenly stopped and questioned myself: what if I actually survive for over 100 years? As counterintuitive as it may sound, the thought of living over 100 years was actually quite scary. Scary not because of the physical or emotional needs at that age, but because of the financial planning required to sustain myself through ripe old age.

I'll share my thoughts on a specific case related to retirement planning. When you talk to a financial adviser or a planner, or use any of the freely available retirement planning tools online, you must specify the age at which you plan to retire and your life expectancy post-retirement. The most standard and accepted input here is a retirement age of 60 years and a life expectancy of 80 years. For some reason, we are shy of keying in a number beyond 80. Perhaps we are limited by our imagination, or maybe we all secretly aspire to live beyond 80; it’s just that we don’t want to see it.

In my opinion, this can be a fatal mistake. I think it makes perfect sense to plan your finances assuming you live up to 100, or maybe beyond. This may not be a bad idea, given all the advances in medical science, awareness of clean eating, emphasis on physical fitness, and perhaps a push towards leading a stress-free life owing to work-life balance. But the biggest question is: how do you go about this, assuming you live beyond 80, maybe 100, or perhaps beyond 100?

I was talking to a friend about this, and his plan was super simple. He said he has a plan B and is hopeful that one of his two kids will take care of him financially if he gets to live beyond 80. I think this is a horrible mistake, and I told him that his kids, or whoever else it may be, will have their own lives to lead and families to take care of. Getting the time and attention itself may be a very big deal; burdening them with financial support may be pushing your luck too far. Of course, you can't depend on the government to take care of you either.

Given all these things, what do you need to do today to be well prepared for a financially independent life even if you live up to 100 or beyond? When you plan to make a hyper long-term investment, you should ensure that the instrument you're investing in is resilient and can survive all hurdles. The instrument you invest in should have longevity. I can't think of another instrument apart from the boring index fund. An index fund is essentially a fund that tracks and invests in a broad index, such as Nifty or Sensex. The fund invests in index stocks in the same proportion as the index.

As you may know, Nifty 50 is an index that invests in the top 50 companies measured by free float market capitalization. This means the list of companies that make it to the index is constantly scrutinized, and by design, only the best, as per the free float market cap, are included in the index. The companies that don’t make it through this criteria are removed from the index, and only those that qualify are included.

As of today, Nifty 50 is 25 years old. You may be surprised to know that only 12 companies have been constant since its formation. Over the last 25 years, nearly 100 companies have come and gone from this list. Some of the companies have even turned bankrupt, but the index as a whole has survived. If you look at the West, the Dow Jones Industrial Average has existed since 1896—126 years of history. In terms of resilience, the index has survived at least two world wars, multiple conflicts, and at least 13 different economic recessions since the Second World War.

Over the years, many companies have been included and excluded from the index. Probably General Electric is the only constant company in the index. But the index, as a whole, has not just survived through 126 years of history; it has performed very well. The index is designed for longevity and resilience. Unlike a single stock or perhaps a mutual fund, longevity and resilience are the two primary characteristics you should watch out for when making a hyper long-term investment, and an index fund fits in very well.

This is not the only reason why an index fund should fit into your long-term investment portfolio, but this is one of the reasons. So here is what I think makes sense: find a good index fund, make regular investments in it—perhaps even set up a SIP. Think about this investment as a hyper long-term investment, and tap into it only in your grand old age. Forget about it until then.

By the way, recently I was in Bangalore's oldest vegetable market, called K Market. There, I bumped into a 102-year-old lady selling ginger and chilies on the street. Just to stir up a conversation, I bought some from her, even though I didn't need it. Her daughter, sitting right next to her—probably in her 70s—mentioned that her mother really didn't need to come to the market every day to sell vegetables, as she had two rent-yielding properties in the market area, indicating that she is financially independent. Yet, the old lady still chooses to come to the market every single day to sell vegetables.

The biggest lesson for me from that conversation was that besides financial prudence, what matters is the enthusiasm for life and doing what you love every single day. I could not help but take a photo of this lady as a reminder of the right financial and general attitude in life.