Why retirement planning needs to account for longevity risk
Embarking on your retirement journey is a significant milestone filled with possibilities and new beginnings. However, being aware of potential pitfalls that could undermine your financial security is essential. One of the most prevalent issues is failing to protect against inflation. Known as the ‘silent thief’, inflation can gradually erode your savings and income purchasing power.
For example, the average price of a white loaf of sliced bread (800g) has soared from just 10p in January 1971 to 140p in August 2024[1]. Therefore, ensuring that your investments and income grow at a pace that outpaces inflation is vital. With our professional advice, we can help mitigate the impact of inflation on your pension and other investments, preserving your buying power.
Preparing for a longer life
Another crucial aspect of retirement planning is accounting for longevity risk. Many underestimate their life expectancy, leading to a potential shortfall in retirement savings duration. According to the Office for National Statistics, a 60-year-old man today has an average life expectancy of 85, but there is, however, a chance they might live longer: 92 years (1 in 4 chance), 97 years (1 in 10 chance) and 100 years (3.5% chance)[2].
A 60-year-old woman today has an average life expectancy of 87, but there is, however, a chance she might live longer: 94 years (1 in 4 chance), 98 years (1 in 10 chance) and 100 years 6.2% chance[2].
Having a realistic financial plan is essential to avoid prematurely depleting your savings. We can use cashflow modelling to help you foresee when your funds might run out and what adjustments in spending could mean for your financial future.
Structuring your income wisely
Effectively structuring your retirement income is paramount to maintaining financial security. Deciding when and how to draw from your investment portfolio can significantly impact you. While general rules of thumb exist, the most effective strategy should be tailored to your unique circumstances and adaptable to your changing needs.
Maintaining a cash reserve for planned one-off expenses and emergencies is advisable. Keeping six months’ worth of essential spending in an easy-access account is wise, allowing you to avoid withdrawing from investments during market downturns.
Navigating dividend income realities
It’s important not to assume that dividend income is guaranteed, as this could lead to financial instability, as dividends are inherently volatile. Relying solely on dividends for a consistent income stream can be risky. We can assist you in building a diversified investment portfolio that maximises retirement income across varied market conditions, helping you navigate the uncertainties that could arise from a dependence on dividend income.
Our professional advice will ensure you can tackle the complexities of retirement planning, minimising risks while enhancing income potential from your savings and investments.
With so much at stake, professional financial advice is invaluable. Our support throughout your retirement journey will provide reassurance and strategic insights, ensuring your plans remain on track.
Source data:
[1] https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/czoh/mm23/previous/v107
[2] https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07
THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.