More than three quarters of 50-64-year-olds underestimate their life expectancy, according to research from Retirement Advantage.
78% of those asked, predicted a much lower age of death than official statistics project, with both men and women believing their life expectancy to be 82 years. Data from the Office of National Statistics shows that the average life expectancy for those in this age bracket is:
- 88 years for men
- 90 years for women
Having an extra few years to enjoy retirement sounds great – if you can afford it. Unfortunately, with so many people underestimating how long their pension fund needs to last, there is an increasing risk of some people running out of money to support their lifestyle.
Pension flexibility effects
The popularity of Annuities, where the entire pension fund would be used to buy a guaranteed annual income until death, is falling. In its place, Flexi-Access Drawdown is becoming the favoured method of taking a retirement income. This option allows you to maintain full control over the amount and timing of withdrawals.
In addition to this, the introduction of Pension Freedoms has given people great flexibility in the way they access pension funds, allowing people to prepare better for retirement.
However, the ability to take a lump sum out of savings before retirement age does mean that some people may find themselves short of income in their later years.
Without careful consideration, this flexibility and control makes it very easy to take too much during early retirement and leaving too little for later life expenses. These are more likely to include personal care and healthcare costs, on top of the usual day-to-day living.
This problem is compounded if you are underestimating your life expectancy.
Managing changing costs
Later life is more likely to bring additional costs. Research from Which? Has shown that, as you age, you should expect to spend more on:
- Utility bills
- Insurance premiums
However, they found that older retirees spend less of their income on:
- Food and drink
- Social activities
Not everyone will have the same priorities throughout retirement, but this does illustrate the point that your spending habits may not remain the same as you get older. It is therefore important to ensure that you have the option to be flexible to maintain a good lifestyle.
It is also vital that you factor inflation into your estimates, as the cost of living will rise over time and your income needs to keep up with it.
How to avoid running out of money
How do you ensure that you have the funds to support your lifestyle, for as long as you need it?
Careful financial planning and forecasting is the answer.
At the Financial Advice Company, we develop a financial plan which will show you the amount you need to live alongside the amount you can afford to spend, sustainably. By using a range of tools, we estimate your life expectancy accurately and prudently, taking into account all variables which will affect your plan, including:
- Investment returns
- Life expectancy
To find out how to make your pension fund last, without compromising your quality of life, get in touch with Ben.