Living to 100: can you afford to live longer?

Human life expectancy is on the rise. Someone born today has an average life expectancy between 87.3 and 90.2 years of age depending on their gender.[i]

An estimated 13.6% of boys and 19.0% of girls who were born in the UK in 2020 are expected to live to at least 100 years of age, and this is projected to increase to one in five (20.9%) boys and over a quarter of girls (27.0%) born in 2045. [ii]

By 2050 the cost of a comfortable retirement will also increase by 150%. Combined with the fact that one in three 30 to 40-year-olds haven’t started saving for any form of pension yet, can we afford to live longer?[iii]

With our ageing population, we’re likely to see significant challenges and potential changes to the public and private funding of pensions. There are ongoing debates about the viability of the State pension in the years to come, as the taxes of working people are expected to help support a growing population of pensioners. with the Centre for Future Studies predicting this could rise to age 70 between 2054 and 2056 and age 71 between 2068 and 2070.

In mid-2020 there were an estimated 11.9 million people of pensionable age in the UK, and this is expected to grow to 15.2 million by mid-2045, a change of 28% and equal to 21.4% of the total population. In comparison, the working-age population is projected to grow by a much slower rate from 42.5 million to 44.6 million, an increase of just 5%.^[ii]

As a result, the old-age-dependency ratio, which displays the number of people of pensionable age for every 1,000 people of working age, is projected to increase from 280 in mid-2020 to 341 by mid-2045. Meaning every 1,000 people working, will be supporting an additional 61 people by 2045.^[iii] 

A stretched nest egg

The strain on many retirees is already present with increased longevity, with many having to spread their finances even thinner over a prolonged period. One in five pensioners – more than two million people – are living in relative poverty in the UK, an increase of more than 200,000 in the past year alone, according to the Centre for [i]. The UK’s average pension pot stands at just £42,651, accounting for just 18% of the recommended total of £237,000 for those retiring at age 67.^[ii] 

Worryingly, 19% of people in the UK say they have no form of private or workplace pension, and a further 18% of the population have a workplace pension but no private pension. ^[i]

These financial challenges for retirees are only set to increase. As life expectancy increases, a bigger pension pot will be needed too. The cost of a comfortable retirement will increase by 150% by 2050 due to longer life expectancy^[iv], which according to The Centre for Economics and Business Research, will mean that retirees not reliant on State pension will need an income of per month for their expected 25+ years of retirement.^[v]

How much does a ‘comfortable’ retirement cost?

To achieve a ‘comfortable’ retirement income, someone who is 35 years old now will need to build up a fund of at least £666,000, not taking into account any State pension existing at that time.^[vi]

Those set to retire in the next 20 to 30 years are simply not saving enough. The median amount in a 30-40 year-old's pension pot today stands at just £14,000.[i]

Currently, those aged 65 can expect to live for a further 20.8 years. By 2045, people aged 65 will be projected to live for another 23.0 years. As the chart shows, this means that those retiring at 65 will need to support almost a quarter of a century in retirement, and an additional 2.2 years.^[ix]

While an additional two years may not sound significant, in financial terms this could mean the requirement for an individual or a couple to save an additional £67,200 or £99,400 respectively, to achieve a ‘comfortable’ retirement (sums estimated before inflation is taken into account).[i]

Exacerbating this challenge is the ongoing cost of living crisis which is causing one in 20 UK adults to stop their monthly pension contributions in response to cost pressures. ^[i]

^{An upward trend for ‘unretiring’}

It is therefore no surprise, that increased longevity is contributing to an ‘unretirement’ trend. This trend shows one in four retirees in the UK are returning to work within five years of retiring, according to research from the British Household Panel Survey and Understanding Society.^[i] Unretiring and delayed retirements are likely to become more pronounced against the backdrop of spiralling inflation, volatile financial markets and the soaring cost of living.^[ii]

18-34-year-olds wish to retire at 60: a pie in the sky?

At the same time, our research finds that many UK adults are not aware how increased longevity may impact the age they can afford to retire. While those aged 55 and over expect to retire at 67, younger generations aged 18-34 are ambitious in their estimations and expect to retire at the age of 60.^[i] This presents a worrying picture, with younger generations perhaps not appreciating how their increased longevity will demand them to either save significantly more, or work for longer.

Evelyn Partners’ view: the options available to achieve a longer or earlier retirement

With increased longevity, individuals have two levers they can pull to support their longer lives – work longer or save and invest more and sooner. With two extra years of retirement to fund as a result of improved longevity, this equates to an additional £67,200 per single individual in order to achieve a comfortable retirement.[i]

Unrealistic expectation can cause shortfalls

As younger individuals enter the world of work, they will need to start saving more, and saving sooner to build a pension pot that will sustain a lengthier retirement.

It’s not only our own increased longevity that presents a challenge, but also the increased longevity of the generations that precede us is compounding this issue. Historically, younger generations have often inherited from parents and grandparents, which has in turn funded life’s key milestones such as buying a home or retiring. With increased life expectancy, the inheritance many people have historically come to expect from elder generations is likely to be significantly eroded. We therefore cannot assume an inheritance is guaranteed to support these goals.

Build up pension pots sooner rather than later

Retirement planning isn’t something we can leave until our 50s. With increased longevity, retirement planning should arguably begin the day we start working. While recognising that with all forms of investing, capital is at risk, now, more than ever ─ we should look to gain the benefit of long-term compounding growth and tax efficiencies of pension contributions over the whole of our working lives.

Where to start when retirement planning

These factors highlight the importance of taking advice and taking it early. In the current climate, with rising inflation and increases in the cost of living, many of us will need expert support in striking the balance between paying for life today and saving for the future. Working with a financial planner to help map out your financial needs both today and into the future, can help with making decisions around how to best use the assets at your disposal, and decide what is most important to you.

How do you juggle paying for life today with saving for the future?

Evelyn Partners is here to help. Our financial planners can work with you to map out your current and future financial needs, help you make decisions about how best to use the assets you have and decide what’s most important to you. We offer free initial consultations with a financial planner as a simple way to find out more about how we can help you.