Since the 19th century, the life expectancy of people in the UK has been steadily increasing. Where once we might have been counted lucky to survive until our 70s or 80s, people born today expect to live at least that long1. And around one in five men and one in three women will make it to over 90 years old.
While the latest figures show that the rate of increase is dropping off, new medical advances are always just around the corner. Healthcare technology in particular and the associated rise in holistic health and preventative care could prove revolutionary in terms of how long we live and how much of that life we spend in good health.
The pension conundrum
There are few people who wouldn’t wish for a longer life, but the quality of that life is at risk in more ways than one. Even as technology such as health monitoring wearables, big data research and tissue engineering meet to maximise our healthy years, the question of how we will pay for them remains outstanding.
According to research from insurer Royal London, people in the UK need to save at least GBP260,000 to live on an average salary after retirement – on top of the state pension. That’s an increase of GBP100,000 from 2012.2
Those who aspire to any more than a day-to-day subsistence in old age need to take into account a number of factors, including their years of healthy life, the unpredictability of interest rates and the impact of complacency and underestimation.
A long unhealthy retirement
Government statistics show that healthy life expectancy has not kept pace with increasing longevity. In other words, we’re living longer, but we spend more of that life in poor health or disability. When measured from 65 years old, instead of from birth, people who reached that age between 2009 to 2011 were expected to spend 7.3 years in bad health, compared to 6.4 years for those who reach 65 in the years 2000 to 2002.3
Although healthcare technology offers real potential to reverse this trend, it doesn’t make sense to plan for medical breakthroughs. Instead, savvy investors need to realise that they may need a certain level of care in old age and plan for it now.
The average cost of a residential care home in the UK in 2017/18 was GBP32,344 a year (this rose to over GBP44,512 a year when nursing care was included4). Britain’s more expensive care homes, meanwhile, could cost up to GBP156,000 a year. This kind of unexpected outgoing needs to be factored into wealth planning.
The pessimistic optimist
Perhaps surprisingly, middle-aged people regularly underestimate how long they’re likely to live. Those in their 50s and 60s underestimate their chances of survival to age 75 by around 20 percentage points and to 85 by around 5 to 10 percentage points. For example, men born in the 1940s who were interviewed at age 65 reported a 65 per cent chance of making it to age 75, whereas the official estimate was 83 per cent. For women, the equivalent figures were 65 per cent and 89 per cent.5
Psychologically, we’re not best-equipped to plan well for our retirement. This underestimation of individual life expectancy leads to people saving less during their working life and spending more money in early retirement than they would if they prepared for actual survival rates.
It also goes hand-in-hand with an optimistic complacency that existing mechanisms – whether that’s the state pension, workplace schemes or personal investments – will be enough.
Your pension plans need to be under constant review to ensure that investments are performing well and your strategy develops in line with changing demographics.
Planning for a long and well-lived future
The fact that we’re living longer doesn’t just change how long you’re going to need your pension for. It also must change the way you invest.
With more people saving, inevitably, interest rates will fall and it will become increasingly difficult to make investments in low-risk assets perform as the population ages. If your retirement is going to last longer, the length of time you devote to higher-risk strategies, such as shares and futures, should rise to bulk out your pension.
Complacency does not just affect those hoping for an average salary in retirement. Falling interest rates, ill health and poor pension planning can quickly curtail a higher standard of living, particularly if you spend happily in early retirement and then live longer than you expected. Smart planning means sticking to the statistics and factoring for a long life with all the unforeseen complications of old age.
Why not contact your Relationship Manager or Investment Counsellor to arrange a meeting to see how our Strategic Financial Planning Specialists might be able to address your wealth planning needs?
1Office for National Statistics, September 2018
2The Independent, May 2018
3Government Office for Science, 2016
4Paying For Care, 2018
5Institute for Fiscal Studies, April 2018