Thanks to advances in medical technology, increased understanding of healthy eating, and the consequences of lifestyle choices, life expectancies in the UK have risen significantly over the last few decades.
According to the Office for National Statistics, a man aged 65 in 2020 to 2022 could expect to live for a further 18.3 years. A 65-year-old woman’s life expectancy was another 20.8 years.
Furthermore, data from FTAdviser shows that the number of centenarians in the UK has more than doubled since 1991, and is set to rise from 16,000 in 2021 to 29,000 by 2041.
This translates to the very real possibility that your retirement could last as long as 20, 30, or even 40 years.
While living longer is undoubtedly a positive thing, it does necessitate a shift in your retirement planning. Continue reading to discover why it’s important to plan for a potentially long retirement.
1. Living longer could significantly affect your plans
Underestimating the financial implications of a long retirement is a common pitfall. Without adequate planning, you might find that you face a shortfall in savings, compromising your living standards in later life.
You likely have retirement goals in mind, like a dream holiday or completing long-awaited home renovations. These plans will have a bearing on the amount of retirement savings you’ll need.
Yet, even with these goals guiding your plan, it’s still incredibly challenging to accurately calculate how much income you’ll need. Unexpected expenses, fluctuating investment values, and inflation could all throw your calculations off course.
This is where the assistance of a financial planner can be invaluable. We can help to build a balanced investment strategy that is appropriate for you. This will typically consider:
- Your risk tolerance
- Any other assets you own
- Any future financial commitments
- Your timeframe for retirement income.
We can use sophisticated cashflow forecasting software to assess your income needs and potential expenditure in retirement. This will help you to understand the effect of the decisions you make, and how changing time frames and attitudes to risk might impact overall returns.
We might also introduce you to the concept of pension “lifestyling”, which involves gradually transferring your pension wealth into lower-risk funds as you get older.
While this strategy aims to minimise the effect of short-term market movements on your retirement fund, it’s vital to note that there isn’t a “one-size-fits-all” solution. In fact, if you end up living a 30- or 40-year retirement, continuing to take on investment risk could potentially offer more competitive returns, helping you maintain your standard of living.
2. It’s vital to plan for your whole retirement
Since retirement could encompass a significant portion of your life – perhaps as much as four decades – an efficient plan should include this whole period.
A helpful first step is to acknowledge that your income needs will likely evolve throughout retirement.
When you first retire and you’re more active, you might spend money on big-ticket purchases to tick them off your bucket list. Later, your income needs might fall. As you enter the later years of retirement, you might slow down, and your health could decline too, necessitating spending on later-life care.
Failing to account for these variations in your retirement plan could lead to a shortfall later in life.
You’ll also need to think about pension decumulation – the process of converting your pension assets into income. This can be challenging but remember that we’re on hand to help.
Drawing an unsustainable amount of wealth from your pension in the early years of your retirement could deplete your fund prematurely. We can help you devise a withdrawal strategy that ensures a steady stream of income throughout your whole retirement.
We can explore the different options available to you, like using a lump sum to fund major one-off expenses while using an annuity to secure a guaranteed income to cover fixed costs. We can also help to factor in the effects of market downturns and high inflation that could see your fund diminished quicker than planned.
3. It’s also worth factoring in for later-life care contingencies
As we’ve already mentioned, your income needs will likely change throughout your retirement. As you age, the possibility that you’ll need long-term care increases, especially during a lengthy retirement.
There’s a good chance you’ll want to live independently for as long as possible, even once ill health strikes. You might adapt your current home or downsize to a smaller property, freeing up capital to supplement your income.
You might find you need to move into residential care or a nursing home, and these costs are a significant consideration.
Indeed, Carehome.co.uk reveals that the average weekly cost of residential care for self-funders is £1,160, while the average nursing home cost if you’re funding your own care is £1,410 a week. This is £60,320 and £73,320 a year, respectively.
Integrating these potential costs into your retirement plan is crucial, otherwise you may end up with a shortfall when you need the money most.
Yet, it’s also important to consider what will happen to your earmarked money if you don’t need it for care.
It’s important to be tax-efficient with the wealth you have, however much it is, and whatever it was earmarked for, or else your loved ones may pay more Inheritance Tax on your estate.
So, it’s vital to consider strategies such as gifting or setting up trusts to mitigate this risk.
At HA&W, we can help you navigate these complexities by offering tailor-made advice based on your specific circumstances. We can assess your overall financial situation, including your pension, savings, and assets, to create a comprehensive retirement plan that accounts for longevity and potential care costs.
This gives you confidence and peace of mind that your financial future is secure, however long you live.
Get in touch
We could help you plan for your entire retirement, factoring in any potential costs so you can avoid a shortfall later down the line. Contact us now to find out how our Chartered financial planners could help.
Please note
This article 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 not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
