Why underestimating your life expectancy can create problems in your retirement

senior couple walking along a harbour jetty

How long will your pension and savings need to last when you retire?

It’s one of the most important questions to consider when creating a financial plan – but it wasn’t always this way.

In years gone by, even reaching retirement age wasn’t a guarantee. When the “Old Age Pension” was introduced in the UK in 1909, it was payable from the age of 70, despite the average life expectancy at the time being (according to Statista) just 52 years old. You’d have had to live 18 years beyond the statistical average just to claim any Old Age Pension at all!

These days, improvements in medicine, health, and lifestyle mean life expectancies in the UK are much higher. The Office for National Statistics (ONS) reports that baby boys born in the UK in 2020 can expect to live on average to age 87.3 years, while the average girl will live to age 90.2 years.

While it may seem morbid, considering your likely life expectancy is important when it comes to ensuring you don’t run out of money in later life. Read on to find out why.

Over-50s are underestimating how long they will live

While life expectancies in the UK have rarely been higher, it seems that many people underestimate how long they will live.

New research from Canada Life shows that people aged 50 and over think they will live until around age 80, whether male or female.

However, the reality is that, according to the ONS life expectancy calculator, a male aged 50, will, on average live to age 84, while a women aged 50 will live on average to age 87.

A 50-year-old man also has a 1 in 10 chance of living to age 97, while a 50-year old woman has a 1 in 10 chance of reaching age 99.

The survey shows that over-50s are underestimating the amount of time their pension and savings might need to last – by an average of four years for men and seven years for women.

This gap in expectation and reality can create additional pressures on retirement planning, potentially leaving retirees short of money in later life.

So, what can you do to ensure your wealth lasts you to the end of your life – even if you live to a grand old age?

1. Make the most of cashflow modelling

Cashflow modelling is a fantastic tool that enables us to forecast what your future finances will look like.

We can input data such as your income, outgoings, assets, and liabilities, and factor in things like your retirement age, inflation, life expectancy, and investment growth to give you a flavour of what you can expect your wealth to look like in the decades to come.

Seeing your future in black and white can give you the confidence to make decisions about taking early retirement or making gifts to family, safe in the knowledge that you won’t run out of money – however long you live.

2. Take sustainable withdrawals

At the point where you decide to retire, your income will then likely come from a range of sources. This will include:

  • Defined contribution (DC) pensions such as workplace or private schemes
  • Defined benefit (DB) pensions from employers
  • The State Pension
  • Savings and investments
  • Earnings, if you decide to continue to work in some capacity
  • Other investment income, such as income from a buy-to-let property.

Carefully managing the income you draw from your accumulated wealth is important. If you draw too much in the early years, you may leave yourself short later on. Additionally, drawing unsustainable withdrawals early also means you deplete your pot, meaning any further investment growth might not be sufficient to meet your later income needs.

We can consider all your sources of income to devise a sustainable income strategy that will ensure you can live the lifestyle you want, as tax-efficiently as possible, without you worrying about whether you have “enough”.

3. Consider an annuity

An annuity provides a guaranteed level of income for the rest of your life – however long you live for. It provides a guarantee that you will receive a certain level of income, irrespective of what happens to the economy or to global stock markets.

An annuity means that you can’t typically outlive your pension, as it will continue to pay you a fixed monthly income – often rising in line with the cost of living if you choose that option – for the rest of your life.

Other retirement options – such as drawdown – offer the potential for future growth aligned with the ability to draw income as you need it.

So, a “mix and match” approach, where you purchase an annuity to provide a guaranteed income supplemented by other withdrawals, can be a useful strategy for many clients.

Get in touch

If you’d like to ensure that you can live the retirement lifestyle you want without concerns about running out of money in later life, please get in touch to find out how we can help you.

Contact us by email at info@blueskyifas.co.uk or call us on 01189 876655.

Please note

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 results.

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.

The Financial Conduct Authority does not regulate cashflow planning.