09/12/20Why life expectancy matters when planning your retirement
When you are looking forward to retirement, working out your life expectancy may not be something that is on your mind. Instead, you are likely to be planning how you will spend your time now you have reached the milestone. However, life expectancy is an important part of retirement planning.
Life expectancy is rising and while pension age has increased too, today’s retirees are likely to be spending far longer in retirement than previous generations. According to the Office for National Statistics, a 67-year-old male has an average life expectancy of 85 years, and a one in four chance of reaching 92. For a 67-year-old female, the average life expectancy is 87, with a one in four chance of reaching 94. The average person can now expect to receive their State Pension for twenty years.
When we think about how long we live for, we often underestimate. It is also important to note that while the average person of 67 is reaching their mid-80s, there is still a significant chance that you will celebrate your 90th or even 100th birthday.
Why does this matter when planning for your retirement? While your State Pension will provide a reliable source of income for the rest of your life, your other assets will need to be carefully managed to ensure they last.
The risk of spending too much too soon
Most retirees will need to make important decisions about how and when they access their pension. Since 2015, retirees have had more choice. This means you have more flexibility, but it also means you will need to be responsible for ensuring pensions and other assets can provide the income you need over a retirement that could last 30 or 40 years.
Without careful financial planning that considers life expectancy, there is a real risk that you could spend too much too soon.
Let us say you retire at 67 and have a pension worth £250,000. You take advantage of the option to take a 25% tax-free lump sum from your pension and want to withdraw an income of £2,000 per month. Assuming your pension grows at a rate of 4% after charges, it would last until you reach 76. This leaves a very real chance that your pension will run out during your lifetime.
As a result, you would need to review the tax-free lump sum and monthly income to provide certainty throughout retirement.
If you did not take a tax-free lump sum and reduced monthly withdrawals to £1,500, you would reach 86 with £17,960 left in your pension, assuming the same rate of growth as above. While an improvement, it could still mean you run out of money in your later years.
Understanding life expectancy can help you balance having enough income in early retirement with caution so you know you will have enough in your later years too.
Of course, on the flip side of this, some retirees are too cautious with their money. After a lifetime of saving, it can be difficult to switch to a financial plan where you deplete assets. It can mean a retirement you have worked hard for does not live up to expectations, despite having the capital to tick off aspirations and goals.
How much income do you need in retirement?
One of the first steps to understanding how your pension can help you achieve lifestyle goals is by calculating how much you need.
In most cases, retirees find they need less income than the amount they were earning to achieve the same lifestyle. This is because the costs associated with working are gone and debt, such as your mortgage, may also paid off. However, you will need to consider what you want your retirement lifestyle to be like and the cost of it.
Do not forget, this income will not all need to come from your Personal Pensions either. You will likely also receive an income from the State Pension and may have other assets that can support you throughout retirement.
With an income figure in mind, you are able to calculate whether your pension could run out too soon. Recognising this before you start taking an income from your pensions means you are in a position to change your plans to bridge the gap.
Making life expectancy part of your retirement plan
When you work with us, we will help you make life expectancy a part of your financial plan. It is a step that can give you confidence in your long-term finances, allowing you to enjoy retirement.
As well as how much you withdraw from your pension, life expectancy can impact your financial strategy in other ways too. For instance, it may play a role in whether you take a tax-free lump sum at the start of retirement or how much investment risk you take once you give up work. Please get in touch if you would like to review your retirement plans.
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. The fund value may fluctuate and can go, which would have an impact on the level of pension benefits available. Your pension could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.