How long will you live in retirement? Not a question any of us want to think about, but an essential one when you are working out how much money you will need to save for your retirement.
Getting it wrong could, of course, have serious consequences and there have been plenty of articles in the media of late with scary headlines about pension time bombs (4). Part of the problem may be that many of us just don’t know how to estimate our life expectancy. If you were asked to estimate your life expectancy what would you base it on?
It seems that many people still consider the age that their grandparents or parents lived to, or rely on statistics provided by the Office for National Statistics. ONS currently predict that someone who is 65-year old now, will live to be 83 if they’re male and 86 if they’re female (1), however, all of this overlooks the improvements in life expectancy that are likely before you actually reach your mid 80’s. Aegon suggest that men entering retirement today can actually expect to live to the age of 90 and women to 92, with many living longer still.
So living longer that we would expect may be good news, but what are you going to use to pay for the extra 6 or 7 years in retirement? With annuities, that offer an income for life, now far less prevalent due to poor returns and the popularity of Pension freedoms (3), the responsibility for saving correctly sits with us. Getting the sums wrong could carry serious consequences, so perhaps it’s time to redo the sums? Living an extra 7 years may mean you need at least an extra 28% in your pension pot.
Steven Cameron, Pensions Director at Aegon, said: “Advisers don’t have a crystal ball any more than retirees do themselves, but average life expectancy statistics should only ever be a starting point. Improving mortality over time could push up the average by half a decade, and people also need to factor in variations based on health, genetics and lifestyle. The upshot is that people should prepare financially to live significantly longer.” (2)
So in summary, you need to be thinking seriously about how to fund a retirement that could well reach into your 90’s. A flexible approach that encompasses an annuity to cover life’s essentials could well make sense. Regular financial reviews with a financial adviser are a great way to draw up a retirement plan that delivers results.
The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.