People are living longer and retirement income needs to keep pace. We look at how you can judge how much you need to retire.
One fundamental aspect of retirement planning is understanding how long your money will need to last. However, the answer is always likely to be uncertain. If we knew when we were going to die, planning would be straightforward.
For retirement planning, the time you have available can make a real difference to the type of investment risks you should be taking. Yet most people won’t know whether their income will need to last 20, 30 or even 40 years. It means that any plan is inevitably a balance of risks and must be sufficiently flexible to adapt over time.
Research shows that most people underestimate how long they will live. The FCA Retirement Income Market Study in 2015 showed that “pension savers display well-known biases, such as a tendency to underestimate longevity”. Men tend to underestimate their life expectancy by around five years and women by around ten years.
Incidentally, this is notably worse among younger people. Research shows that those aged between 25 and 34 predict that they will only live to see their 79th birthday. However, given current longevity trends, today’s 30-year-old can expect to reach 90 on average, while one in five millennials will live to 100.1
According to the Office of National Statistics (ONS) life expectancy calculator, a 65-year-old woman can expect to live to 87, while a man of the same age is expected to live to 85. The 85+ group is the fastest growing and is set to double to 3.2m by mid-2041 (ONS 2018), while the number of centenarians living in the UK has increased 85% in the past 15 years (ONS 2018).
However, these average statistics give us little real information about any particular individual. Who is average after all? Very few people will die at precisely the age indicated by life expectancy. Life expectancy can vary with where someone lives – with people in more affluent areas living longer than those in deprived areas - or their genetic make-up, or simply the luck of the draw. From a planning perspective, this isn’t very useful.
We start from the premise that the real risk is that you outlive your wealth. As such, from a planning perspective the starting assumption needs to be that you will live to a ripe old age. Certainly, it will take into account factors such as genetics and family history, but these may not be deterministic. Lifestyle is another important factor; care needs are another. Any plan needs to assume longevity and then be flexible enough to adapt as time goes on.
It will also need to take into account the life you want to live. Harvard has been running an 80 year study into what makes a happy life: researchers found that while genes and lifestyle play a part, good relationships protect our bodies and our brains. It is important that any planning involves a discussion on your ‘wants’ as well as your ‘needs’.
With this in mind, we would argue that there is no one answer to the question ‘how much money do I need in retirement?’. The answer is likely to be unique to every individual and will need to adapt over time. The real skill in financial planning is finding the right option for everyone.
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By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Smith & Williamson Investment Management LLP
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