Longer life expectancy of retirees presents challenges in retirement

The longer life expectancy of retirees presents challenges in retirement.

The good news? We’re living longer. The bad news? We’re living longer.

Such is the conundrum faced by retirees and their financial advisers. Since 1960, Great Britain’s average life expectancy increased to 83.5 for males and 85.9 for females.

The life expectancy of retirees by the numbers

While living longer is a positive development, it could produce substantial risks for retirees. According to a report from the Office of National Statistics, the average life expectancy of a 65-year-old UK man is 18.5 years. The figure for women is 20.9 years.

Strictly from a retirement planning standpoint, the increased life expectancy of retirees presents numerous challenges. The first is in estimating how much money one will need in retirement. While it’s popular to think of a “magic number” for retirement, the reality is much more complex. Assets will likely continue to be invested through retirement while money is being withdrawn. Determining how much investment risk to take, how much growth to target, and how much can safely be withdrawn every year is dependent on estimating how long one will live.

Planning for a longer retirement

Assuming one’s retirement assets and investment returns stay the same, a longer life expectancy of retirees drastically changes how you can afford to live and how you should invest. It likely reduces the number of withdrawals you can safely take. Living longer can have a wild effect on investment planning. On one hand, you may be tempted to invest more conservatively to protect your assets over a longer period of time. On the other hand, more growth may be needed to combat inflation over those extra years.

Experts say that estimating one’s life expectancy based on parents or grandparents lifetimes may be faulty thinking. According to a study by the Society of Actuaries, most retirees underestimate their life expectancy, and more than 40 per cent underestimate it by more than five years. Given the uncertainty around life expectancy, the best solution may be to plan for the longest possible life.

Faced with that reality, retirees have a few options. The most obvious is to save as much as possible.

If you have a pension and have some flexibility in when you start receiving benefits, you could choose to start them later. With many pension plans, starting benefits later allows for a higher pay-out. However, much like an annuity, there is a risk that you could pass away before the decision to wait for pays off.

A financial adviser can help you determine how best to manage your life expectancy risk and accordingly devise, implement and manage a sound and workable retirement planning strategy for your finances. Living longer is a good thing – as long as you plan wisely.

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