Franzo Friedrich | Longevity risk vs inheritance risk: do you really have to make a choice?

Conventional retirement planning has traditionally been framed as a binary trade-off. Prior to retirement, most people are under the impression that they must choose between two competing priorities: securing their own lifelong financial freedom or preserving capital to leave a meaningful financial legacy for their heirs.

This tension is intensifying across the domestic market. Longevity risk - the very real probability of outliving one's accumulated savings due to medical breakthroughs and expanded life expectancies - is increasingly colliding with inheritance risk, which is the risk of leaving behind insufficient wealth for the next generation.

Historically, investors budgeted for a 25- or 30-year retirement window, typically solving for capital longevity between the ages of 65 and 90. However, macroeconomic realities and shifting structural dynamics have broken this baseline. Today, it’s no longer uncommon for insurers to manage income portfolios for individuals living well past the age of 80, 90, or even 100. Living longer means your capital must work harder, for longer, under increasingly volatile macroeconomic pressures.

The pressure on the sandwich generation

This extended longevity has fundamentally transformed the financial landscape for South Africa’s "sandwich generation". This segment of the population faces a dual financial squeeze, finding themselves simultaneously responsible for the care of aging parents and the ongoing support of adult children who are navigating high cost-of-living challenges.

When a middle-aged professional is forced to fund multiple generations across a single household ecosystem, their capacity to prioritise their own retirement savings diminishes sharply. This financial strain often manifests as a self-fulfilling prophecy: by draining their current cash flow to support family networks, investors compromise their own long-term compounding, ultimately running the risk of becoming a financial burden to their children in the future.

The emotional and behavioural factors surrounding legacy planning further complicate these dynamics. Driven by various reasons, there is a desire to establish true generational wealth, many investors commit to leaving a significant inheritance.

When you couple this emotional bias with the compounding erosion of high inflation, fluctuating interest rates, and market volatility, the sustainability of a retirement income stream faces severe pressure. Many individuals systematically underestimate how quickly everyday affordability challenges can eat into their core capital.

The mutually exclusive myth

The real challenge isn't choosing between retirement security and leaving heirs an inheritance, it’s designing a holistic financial strategy that actively incorporates both. Achieving this balance requires moving away from rigid, all-or-nothing product structures and embracing modern, hybrid capital allocation models.

To navigate this successfully, investors can divide their post-retirement cash-flow requirements into two distinct categories: life expenses (the non-negotiable costs of basic survival, including secure housing, food, and robust post-retirement medical aid coverage) and living expenses (the discretionary, quality-of-life spending, such as traveling, family vacations, or funding memorable experiences with grandchildren.

By structuring capital around these distinct needs, a professional financial adviser can help pre-retirees blend capital tools rather than choosing between them. For instance, an investor can allocate a portion of their savings into a guaranteed life annuity to securely back their essential, non-negotiable life expenses with certainty, shielding themselves entirely from market volatility and longevity risk.

With that foundational baseline guaranteed for life, the remaining portion of the retirement capital can be structured inside a market-linked living annuity to fund discretionary living expenses. This balanced allocation allows the investor to safely take calculated, higher-conviction market risks to beat inflation, while preserving the underlying capital wrapper as a clean, structured legacy to cede directly to their heirs upon their death.

Planning for both outcomes

Ultimately, navigating the tension between longevity and legacy requires a behavioural shift. Relying on reactive, short-term cash management or treating long-term compounding vehicles as open liquidity pools artificiality accelerates wealth destruction.

By engaging in advanced, joint-life cash-flow modelling early in the planning cycle, it is possible to break the cycle of generational dependency. When financial plans are personalised to match an individual's unique family context, retirement security and legacy aspirations stop being mutually exclusive goals. Through thoughtful, structured planning, you can effectively secure your future self while firmly protecting the next generation.

*Franzo Friedrich, Chief Marketing Officer at Momentum Investments.