One of the most fundamental risks in retirement is longevity, the risk of running out of money before running out of life. Whilst there are a lot of benefits to living a long time, longevity undoubtedly increases financial risk.
So just how long will your retirement plan need to generate income? Most people underestimate their life expectancy, often significantly.
A man who is 65 years old today has a 50% chance of living to 87 or longer. One in four men aged 65 today is expected to live to age 93. Amongst women aged 65 today, one in four will live to age 96 or longer.
And these are just averages – so many people will live significantly longer than this.
In a married couple aged 65 today, there is a 75% probability that at least one spouse will live to 88 or longer – and a 25% probability at least one spouse lives to 98!
These stats are even more staggering the lower down the age groups we go.
For example, a healthy 45-year-old male currently has an average life expectancy of 91 years, and over a 15% chance of living until 100. So if this person retires at age 65, that is an average of 26 years of retirement which they will have to fund.
The figures become even more startling when we look at younger generations. For people currently aged 20-25, it is projected that 1 in 4 of them will see their 100th birthday. Again, assuming a retirement age of 65, that is 35 years of retirement – in fact, nearly as long in retirement as they spent working.
You still need to pay the living expenses for all those years and annual expenses may even increase as you get older and require more medical and long-term care in later life.
This poses many questions when considering or planning for retirement. How much do I need in my portfolio to fund my retirement and what is a safe amount to withdraw from my portfolio annually?
How much you need in your portfolio for retirement depends on many factors. As a rule of thumb, a “safe” withdrawal rate is around 4% per annum of your total funds. Ignoring tax, a 4% withdrawal rate on a £750k portfolio would be £30,000 per year. But you also need to factor inflation into the equation which, although low now, has topped out at over 25% per annum within living memory.
This means that it is very important to look at the right mix of investments and the right timescales. Whereas many retirees might previously have considered that retirement was a short-term affair, the previous statistics should have given the game away that many are in it for the long haul.
At Foresight, we are experts at helping people organise their finances. We use sophisticated cash-flow modelling to help us to paint a picture of your situation, incorporating your income requirements as well as other expected one-off expenses in retirement. This enables us to adapt our planning to your unique situation to allow you to enjoy a stress-free retirement.
If you would like to discuss your own situation, then please get in touch and one of our Wealth Strategists who will be pleased to help you.