Are you risking a pension shortfall by overlooking longevity?

11 March 2024

A survey suggests that some retirees could risk running out of money during their lifetime because they haven’t considered how long their assets need to last. Failing to factor longevity into your retirement plan could mean your later years don’t live up to expectations or you may face financial insecurity.

The report published in IFA Magazine found a worrying 68% of Brits have not thought about how many years of retirement they need to fund.

It’s an oversight that could mean you don’t put enough away for retirement during your working life and may not spot the potential gap until it’s too late. Or that you unintentionally withdraw too much from your pension during the start of your retirement.

The average person could spend two decades in retirement

The survey found that most people expect to retire between the ages of 65 and 69. Data from the Office for National Statistics (ONS) suggests the average person could spend at least two decades in retirement.

A 65-year-old man has an average life expectancy of 85. For women of the same age, it’s 87. As life expectancy has increased, younger generations are likely to spend even longer in retirement if they plan to stop working in their late 60s.

However, creating a retirement plan based on the average life expectancy could still leave you facing a significant shortfall.

A quarter of 65-year-old men are expected to celebrate their 92nd birthday, and 1 in 10 will reach 96. If they only planned for a 20-year retirement, they could find they don’t have enough money to maintain their lifestyle in their later years.

Similarly, a quarter of 65-year-old women are expected to live to 94, and 1 in 10 could reach 98.

Retirees today often need to consider how they’d cope financially if they live to become a centenarians to create long-term financial security and peace of mind. With retirements that span decades becoming the norm, it’s more important than ever that those nearing the milestone consider longevity.

A retirement plan could help you create a sustainable income

Understanding what income you can take sustainably from your pension or other assets in retirement can be difficult. After all, you don’t know exactly how long you need to create an income for.

Another key challenge is that your income needs might not stay the same throughout retirement.

Indeed, inflation alone is likely to affect your outgoings even if your lifestyle remains the same. Even when inflation is stable, the rising cost of living may compound. The Bank of England’s inflation calculator shows how your income would need to grow to maintain your lifestyle.

Between 2003 and 2023, inflation averaged 2.8% a year. That might seem relatively small, but it can have a huge effect on your essential and discretionary spending. If you retired in 2003 with an income of £30,000, to simply maintain your spending power, it would need to have grown to more than £52,000 a year in 2023.

 There are other reasons why you might want to adjust your income in retirement too, such as:

• Changing your lifestyle
• Paying for care
• Financially supporting loved ones.

Working with a financial planner to create a retirement plan that’s tailored to you is a step that could ensure you’re financially secure throughout retirement and offer peace of mind.

We’ll be able to work with you to explore the different options and assess which ones are appropriate for you. For instance, if you’re worried about running out of money and would prefer a reliable income, we may offer advice about annuities, which could provide a guaranteed income for the rest of your life. Or if you want to take a flexible income that you can adjust to suit your needs, we can work with you to understand how you might manage risks.

A retirement plan may also address concerns you might have, such as how your partner would cope financially if you passed away or what would happen if your investment portfolio experienced volatility. 

Contact us to discuss how you could create financial security in retirement

The thought of running out of money in your later years could make planning your retirement seem like a daunting prospect. Luckily, we’re here to offer you guidance as you near the milestone and then settle into your new life.

As part of your retirement plan, we’ll help you consider how to create long-term financial security using your pension and other assets, as well as other areas, from how you could improve your tax efficiency to setting out your wishes in a will.

Please contact us to arrange a meeting.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts. 

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