Longevity and retirement planning
Let’s cut straight to it. When do you think will you die? It’s not a pleasant question, or one you are likely to be asked often, but statistically, how old do you think you might be? There’s an enormously practical reason to consider your mortality; funding retirement.
Research published by Retirement Advantage shows that almost 80% of people over the age of 50 significantly underestimate how long they are likely to live, putting them at a serious risk of running out of income.
On average, both men and women aged between 50 and 64 expected to live to 82 years old. In reality, statistics suggests their actual expectancy to be 88 and 90 years old respectively; potentially a six and eight-year pension shortfall.
Andrew Tully, Pensions Technical Director at Retirement Advantage explained that “Planning for retirement can be a complicated business and no one knows how long they will actually live.” Quite right! He continued; “The pension freedoms have given people the opportunity to plunder pension pots early, often before planned retirement ages.”
Pension freedom was announced by the Government in the 2014 budget to start in the 2015/16 tax year. It meant that anyone aged 55 and over can take the whole pension amount as a lump sum, paying no tax on the first 25% and appropriate income tax on the rest.
It was the biggest pension shake up in decades. Spend or invest as you see fit, no more compulsory annuities. HMRC data shows more than £14bn has been unlocked from defined contribution schemes since pension freedoms came into effect. It may feel like a lottery win at 55 for some, but what about the future? And what if that future extended eight years longer than anticipated?
If your health deteriorates care costs can be an unwelcome shock. On the other hand, if you’re in fine fettle you are likely to want to be more active, take up new hobbies, go on more holidays and make more memories. You might spend as much, just in completely different circumstances. Either way, as Tully concludes, planning is key:
“‘This is an area where proper financial advice is key. An adviser can make a plan for your personal retirement journey which considers all the risks at play, whether that be investment risk, or the risk of living longer than you may have expected.”
Being realistic is the absolute key. The sheer volume of journalists writing about spiralling care costs aren’t scaremongering, it is reality. Couple this with a severely underestimated lifespan and you have a recipe for disaster.
Predictable, reliable income at this time of your life fundamental. Whist annuities are still available for a guaranteed income, the alternatives presented by pension freedoms have effectively killed the market and annuity rates available are at an all-time low. Retirement options have become much more complex and the key is good financial planning.
Effective cashflow forecasting predicts the growth and income available from your pensions and investments in the short, medium and (beyond expected!) long term, providing the ability to plan your retirement in various scenarios; at different ages, with the impact of large purchases, care costs, gifting to your family, downsizing your home, etc.
They are not static and need regular reviews to echo reality, but having the peace of mind, knowing how much you need to save each month for your desired retirement lifestyle? That’s invaluable.
Knowing that if, as many are statistically likely to, you underestimate your life expectancy you still have the means to support your needs at such a vital time? That’s imperative!