Longer life expectancy 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 advisors. Since 1960, life expectancy in France has shot up from 69.87 years to 81.67. Great Britain’s average life expectancy increased over the same period from 71.13 years to 80.75 years. The same is true on the other side of the Atlantic. Life expectancy in the United States has increased from 69.77 years to 78.64.
While living longer is a positive development, it could produce substantial risks for retirees. According to a 2012 report from the Office of National Statistics, the average life expectancy of a 65-year-old UK man is 18.3 years. The figure for women is 20.6 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 Assets will likely continue to be invested through retirement while money is being withdrawn. Determining how much investment risk to take, how much growth to target, and how much can safely be withdrawn every year is dependent on estimating how long one will live.
Assuming one’s retirement assets and investment returns stay the same, a longer life in retirement drastically changes how you can afford to live and how you should invest. It likely reduces the amount 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 2005 study by the Society of Actuaries, most retirees underestimate their life expectancy, and more than 40 percent 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. Another option is to consider investment products like annuities. Insurance companies offer annuities as ways to turn a lump sum of assets into a predictable stream of lifetime income. The benefit is that you’ll continue receiving the income as long as you live. The downside is that if you pass away relatively early, you may not get back what you invested. Annuities can come in a variety of forms and with multiple options, so be sure to consult with a knowledgeable financial advisor before committing to one.
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 pays off.
A deVere Group financial advisor 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.