Living for more than a decade in retirement was still the exception rather than the norm when those now reaching retirement started out on their working lives.
Average life expectancy around half a century ago was still in the late 60s for men and the mid-70s for women.1 That has now changed dramatically – but the way we think about retirement hasn’t necessarily evolved with it.
A man aged 65 now can expect to live for another 18.6 years – a fifth of his lifespan – while a 65-year old woman can look forward to another 21 years, according to the Office for National Statistics (ONS).2
As our lifespans increase, you don’t want to be left having to fund retirement years you hadn’t accounted for.
“Life expectancy is usually quoted as a single age, but the probability of survival beyond that age is often overlooked,” says Tony Clark, Head of Retirement Marketing at St. James's Place Wealth Management.
The ONS life expectancy calculator reveals that a 45-year old man can expect to live to 84. But there’s also a one in four chance of him reaching 93, a one in ten chance of getting to 98, and a five per-cent chance of achieving centenarian status.
A study by the Institute for Fiscal Studies found that people tend to underestimate how long they’ll live.
People in their 50s and 60s underestimated their likelihood of living to 75 by about 20 percentage points, and to 85 by between five to 10 percentage points.3
The result is ‘longevity risk’ - the extent to which an individual’s actual life span significantly exceeds his or her life expectancy. Longevity risk is one reason why more people are running out of money in retirement. Indeed, retirees are expected to outlive their savings by eight to 20 years, according to the World Economic Forum.
“And in reality the gap could be even bigger,” Clark says, pointing out that “people tend to underestimate their life expectancy in relation to average longevity.”
Setting your retirement funding plans according to your average life expectancy creates a risk of having extra years to fund that you hadn’t accounted for. If you allocate your assets and income to a specific age or fixed point in time, you could come unstuck.
It’s also easy to form inaccurate assumptions about your spending and income needs, and how they will change over retirement. Spending in later life often forms a particular curve, notes Clark.
“You may have your active years early where you spend more on holidays and leisure activities, before reaching a point where spending tails off. But as you get into older age and the chances of needing care increase, expenditure will start to tick back up.”
The waters are muddied further by the likelihood that it isn’t just your own finances you’re planning ahead for; the longer your retirement, the more it becomes an intergenerational process.
“How do you plan when your retirement could be 30 years plus – and when you could be supporting your own parents, as well as children and grandchildren? It’s not just your own retirement. It’s much broader than that,” according to Clark.
Precise life expectancy will clearly vary by individual and is shaped by a wide range of factors, including physical, psychological, lifestyle and socio-economic characteristics.
The point is that we don’t know when we will die, which means there’s avery good chance of guessing wrong.
Financial advisers have the expertise and resources to help you avoid making that mistake.
“These days financial advisers have access to sophisticated cashflow planning software that takes longevity into account,” Clark explains. “Cashflow modelling takes out the guesswork and applies science to it, so that you can understand what it means for your income and capital.”
An adviser will also regularly review your plans to help keep them on track. Your retirement could last for nearly as long as your working life; your circumstances and needs will change over time and your life expectancy is a moving target. Get a handle on that and you’re on the way to having retirement plans that are built to last.
At a time when many of us can expect to have a 30-year plus retirement, your Blythswood Associates Financial Adviser can help you understand your individual cashflow needs – and plan accordingly.
The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation can change at any time and are generally dependent on individual circumstances.
1. “How has life expectancy changed over time?”, Office for NationalStatistics, September 2015
2. National life tables, UK: 2016-18, Office for National Statistics,September 2019
3. Subjective expectations of survival and economic behaviour, Institute for Fiscal Studies, April 2018
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