Longevity: The hub of retirement planning
A longer life expectancy may be good news, but it also presents a number of challenges
Imagine how much more simple retirement planning would be if we could accurately predict how long each client will live for. If that information were available, we could advise, with certainty, on the best investment strategy, the likely impact of inflation, and how much money to withdraw, and when.
The variables associated with longevity risk
A 70-year-old in good health could live to be 100, in this case a reasonable withdrawal rate would be no more than 3-3.5% each year1. In contrast, someone in poor health, with no beneficiaries, may choose to take a much higher withdrawal rate, but, unfortunately, this degree of certainty about life expectancy rarely exists.
Investment strategies may also be influenced by life expectancy. Someone in their 70s or 80s might consider lower-risk investment options that are not subject to market volatility. However, that may not be the most suitable option for a retirement that could last for 35 years, as planning over long periods usually requires exposure to growth assets.
Inflation isn’t a major risk over short periods, but it is more significant over the long term. At 2% the value of £1 over 30 years would almost halve2. In contrast, over the last 30 years, inflation averaged 3.1%3.
Approaches to life expectancy – the merits, pitfalls and key factors to consider
Average life expectancy data can be a useful way to track the trends and improvements across the population as a whole, but it is ineffective in forecasting the life span of each individual.
Probabilities are more useful in this context. A 65-year-old woman has a life expectancy 87, but a one in four probability of living to 94, and a one in ten chance of living to 98. For men, the equivalent figures are about two years less.
Life expectancy figures should only be used as a broad indicator
However, predicting the age that someone is going to live to, is not quite as simple as that; even life expectancy data provided by the ONS calculator can lack the precision we need. To estimate the likely longevity of a client, there are various factors to consider:
- Socio-economic groupings
The average UK population may not be reflective of your individual clients. The figures shown in the chart would vary, if socio-economic groupings were considered. If our 65-year-old woman is from a wealthier socio-economic group, and in good health, she has a one in four chance of living to 96, and a one in ten chance of living to 1004.
- The greatest wealth is health
An individual’s health will also impact their life expectancy; both sexes can expect to spend about half of their average life expectancy at 65 in poorer health. Again, these are averages. Someone could remain healthy for 20 years, or fall seriously ill in the first year of their retirement.
- Lifestyle factors
Most people will know someone who smoked, ate unhealthily, drank excessively and lived to a ripe old age. These outliers are just that – the exceptions that prove the rule.
Socio-economic grouping, health and lifestyle factors are interrelated, with a growing body of research indicating that health outcomes in Britain are linked to socio-economic circumstances5. These factors are all helpful in informing individual life expectancy, but it’s still an inexact science, which is why many advisers routinely plan to 100 years.
There is, however, an issue with this approach. A ‘safe’ withdrawal rate at 65 is usually considered to be 3-3.5% each year6, but this may not be enough for many people to live comfortably. Of course, there’s the State Pension and clients may have a defined benefit pension or other assets that they can draw an income from. Increasingly, property equity will become a valuable asset to help fund retirement, via downsizing or equity release.
One option you could consider for your clients, to reduce the risk posed by longevity, is a secure guaranteed income. The risk of a client living longer than their retirement savings last may be reduced, or removed, when an income is payable for life. What’s more, 62% of our customers who purchased annuities 23 years ago, are still alive and drawing their annuity income7.
We’re living for longer and choosing more varied retirements than ever before. Although we don’t know how long an individual may live, we can take steps to help them deal with this uncertainty. A guaranteed income to underpin a client’s portfolio, and cover essential spending, can largely mitigate longevity risk, while providing the freedom to invest a client’s other assets with more flexibility.
Want to know more?
If you would like to discuss the impact of longevity on retirement planning, or find out how a guaranteed income can support your clients’ objectives, contact our dedicated team of Account Managers.
The long and short of longevity risk webinar recording is available to watch on demand.
1Can we help consumers avoid running out of money in retirement?, Institute and Faculty of Actuaries, March 2018
4Legal & General’s predicted view of the survival of a healthy 65-year-old woman in a more advantaged socio-economic circumstance.
5Health gap between rich and poor has widened, UCL.
6Can we help consumers avoid running out of money in retirement?, Institute and Faculty of Actuaries, March 2018.
7How many of the annuitants who purchased in 1997 are alive today? Legal & General Retail Retirement Income customer data.