Rising longevity is a big challenge facing our society, but one that can be managed with foresight and planning.
The German Chancellor, Otto von Bismarck, introduced the world’s first state pension in the 1880s. You had to be 70 years old – and the expectation was that you would only live a few years after that to collect it.
Bismarck designed the system in a very different world. Today, many of us can expect to live well beyond 70. A recent study by UBS found that around a third of wealthy individuals in the UK are confident about living to 100.1
Yet many are anxious about the financial implications of extended old age. Retirement is fast becoming about not living too long rather than dying too soon; about not outliving our financial security.
In response, people are already considering working past the traditional retirement ages. For the first time in UK history, there are more than 10 million people aged over 50 in employment.2 And with the State Pension age rising, the number of older workers is expected to keep growing.
For many, continuing in the workforce is about job satisfaction, having a purpose, or a way of ‘giving back’. For others, it is about maintaining physical, emotional and cognitive health, plus, of course, financial security. Whatever the motivation, longevity is changing how we think about work, retirement, lifelong learning and reskilling.
Rising life expectancy is also making us reconsider the right time to access pension savings. In the past, middle age was deemed to start in one’s 30s. Nowadays, middle age doesn’t start until 45 or 50. If this is the case, then the traditional retirement ages of the past are outdated and drawing on a pension at 60 or 65 may be too early.
Hidden within the life expectancy puzzle is the fact that our longer lives won’t necessarily be all in good health. This needs to be taken into account when preparing for the 100-year life.
“If we could be retired for upwards of 30 years, then it is reasonable to assume our circumstances could change,” says Tony Clark, Head of Retirement Marketing at St. James’s Place. “You could find your spending increases as you transition into retirement, then decreases as you become less active, and then eventually increases again with a potential need for care provision in later life.”
The Queen’s centenarian letter-writing team has been expanded following a huge surge in the number of people reaching the age of 100.
If life expectancy is something of an educated guess, then planning for retirement income should probably contain a mix of guarantees and flexibility.
Although the much-maligned annuity has fallen out of favour, it is still the only way to guarantee income for life with no investment risk. For this reason, an annuity shouldn’t be discounted.
Of course, you can keep your options open through retirement and leave your money invested. The compounding effects of equity market growth and reinvested dividend income will help to increase the likelihood of generating a rising level of income. But staying plugged into markets comes with its own responsibilities.
Given the requirement for a predictable income over an uncertain timespan, it may be tempting to invest in a low-risk portfolio. But if you’re taking out 4% to 5% of your investment portfolio annually, it’s questionable whether you would generate enough returns to maintain your living standards for 30 years or more.
“You will likely need a portfolio that is designed to both grow and preserve your capital for the longer term, as well as utilising funds that specifically cater for income purposes,” says Clark. “Finding the right mix that is specific to your views on risk is where a financial adviser comes in. They will do the heavy lifting when it comes to portfolio management.”
Retirement has the advantage of being one of the few times when we can freely rearrange our lifestyle and its priorities. Spending more time with family, learning a new skill or travelling extensively can define an entirely new way of life.
But it requires careful planning in order to balance the financial and the non-financial, the economic and the emotional. While money isn’t everything, knowing you’ll be able to meet your basic needs – with enough left over to realise your retirement ambitions – is something well worth planning for.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.
1 UBS Investor Watch, 2018
2 Office for National Statistics, UK labour market: January 2019
The information and opinions contained in this blog are for information only. They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice. Before acting on any of the information contained in this blog, please seek specific advice from Gilson Gray Financial Management.