Longevity And Other Risks In Retirement

From a financial planning perspective we tend to kill our clients off at age 99!

I’ve only had a few clients want to extend their financial plan beyond this age and I remember one client who was adamant that he wasn’t going to make it past age 86 and he’s still going strong well into his nineties!

It is important to understand longevity when designing financial plans for clients as well as other associated risks.

Longevity Risk

Most people under-estimate their longevity and so, by using age 99 as our backstop we can provide an indication as to whether a client will achieve financial independence; in other words, will they run out of life before they run out of money. Longevity can be linked to genetics so if a client comes from a long-lived family we may agree to extend the plan beyond age 99.

Investment Risk

As we are living longer so our money has to last for longer and increasingly, this risk is being borne by individuals. In the past a guaranteed income for life was often paid by a final salary scheme but now people are dependent on their workplace and personal pensions and other savings they might have where they have to make the investment decisions and accept the investment risk.

Financial planning is a great way of illustrating to clients the level of investment risk required to achieve their objectives. We often see prospective clients either taking too little or too much risk or not fully understanding the level of risk they are taking.

Investment risk in the accumulation phase of a client’s life is typically linked to volatility whereas in retirement this shifts to the reliability of income.

Expenditure Risk

We can model a client’s expenditure throughout retirement and we adjust upwards and downwards depending on the different phases of retirement.

For example, we may increase pre-retirement expenditure by, say, 25% to reflect the more active phase of retirement and this may last ten to 15 years. We may then reduce this to, say, 85% of pre-retirement expenditure in the slowing down phase of retirement.

We will then take into account any capital withdrawals during retirement. This will reflect money used for children’s weddings, new cars, extended holidays and house refurbishment amongst others.

As well as the risk of running out of money, perhaps a greater risk is that clients die with too much money. We often find that we are encouraging clients to spend more; after all what is the point in having millions of pounds in the bank when you die if you haven’t taken the holiday of a lifetime!

Inflation Risk

It is important that we take inflation into account as this can have a significant impact on expenditure as the following table shows.

Increase in prices of various items between 1992 and 2022

Although it is difficult to accurately forecast inflation, it is important that we use conservative assumptions within our financial plan and review these each year.

Inflation risk is also linked to investment risk. Most people in retirement would want their income to at least keep pace with inflation which necessitates a degree of investment risk.

Health Risk

Whereas increased longevity is a great thing, there still remains a gap between life span and health span. Often health issues will appear in later life and may range from being relatively minor to more severe health issues which could impact mobility and may lead to clients considering downsizing, for example.

Long-term care costs may also need to be considered and, again, this can be factored in to a client’s financial plan.

Conclusion

Increased longevity is a great thing, after all, hopefully, it enables us to do the things we want for longer. However, for some people, increased longevity causes worry that they will run out of money in their later years. Having a comprehensive financial plan, reviewed regularly can provide the peace of mind that you shouldn’t outlive your money.

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