Life expectancy is one of the most difficult things to factor into your financial plan. Overall, human life expectancy is increasing as advances are made in science and medicine. However, recent figures show that that growth is gradually slowing down and may even be taking a slight hit in some areas of the UK. (Source: Office for National Statistics (ONS))
So, how are you expected to plan for a retirement of unknown length?
Carefully, and with caveats which protect you; whether you underestimate, overestimate, or get your life expectancy exactly right:
Risks of overestimating
Overestimating how long you will live can result in a lack of provisions being put in place to protect the assets that you leave behind. This could result in:
Leaving your family with a big tax bill: If you think you are going to live longer than you do, it is likely that you will try to hold on to money for later life, without taking advantage of the available strategies for reducing the Inheritance Tax payable on the value of your estate. To overcome this, you could take out a Life Insurance policy which will pay out enough money to cover the tax bill.
Making unnecessary sacrifices: If you plan to support yourself for 30 years of retirement, but only live to enjoy 15 of them, that’s 15 years of income that you could have used earlier, to enjoy those years more. However, this line of thinking could be dangerous, if you end up living longer than you have planned.
Not enjoying retirement as much as you should: They often say that we regret the things we don’t do, more than the things we do. Therefore, it is important to make sure that you can afford to enjoy the lifestyle you’ve been looking forward to during your working years, without using the money you could need in later life.
Risks of underestimating
Planning to be retired for less time than you really are, can mean that you:
Spend too much, too soon: If you believe that you will only be retired for 10 years and spend all your pension fund within that time frame, you will struggle in later life. A good rule of thumb to make your money last longer, is to rely on your guaranteed income, such as your State Pension and any Annuities or Defined Benefit pensions you may have, to support your essential and living costs. This frees up your flexible income, including capital held in drawdown, to pay for any incidental or large expenses.
Are unable to afford care: Retirement expenditure tends to increase toward the end of life, especially if you require care or medical assistance. If you plan for this eventuality, you should be fine. However, you may struggle if you have planned to use all your retirement income within a few years and end up needing to spend money on healthcare or accommodation in your later years.
A plan that works both ways
Retirement planning can be complicated, especially as everybody will be looking for different things when they stop working. To achieve the ideal retirement for you, you will need to plan for all lengths of life, as hard as it may be to consider.
Knowing what you want: To begin with, you need to know what your retirement aims are. What kind of lifestyle do you want? What do you want to achieve when you stop working? What’s important to you? Once you know this, you will be able to align the rest of your retirement planning to ensure that you meet these goals.
Financial planning: A financial planner will help you to create a life-long plan which will ensure that you spend the right amount, with caveats for under and overestimating your life expectancy. This plan will take both your potential life expectancy and personal health into account, with enough flexibility to account for any surprises you may run into along the way.
Speaking to a financial adviser is one of the best ways to feel confident in your financial strategies and decisions.
For more information, or to discuss the ways in which your retirement plan could be smarter, get in touch with us on 0800 612 8099 or request a call back by clicking here.