Would your retirement savings survive a 100-year life?
Statistics show that almost one in five women aged 25 today will live until the age of 100. A 25-year-old man has a 14% chance of living to the same old age. And, the Office for National Statistics estimates that a woman already aged 65 has a 7.4% chance of living to 100.
Despite many people reaching old age, pension savings are unlikely to survive quite as long. A major study by the World Economic Forum across six nations has found that many people, particularly women, could face a significant cash shortfall in later life against this backdrop of increasing longevity.
Savings could see retirees run out of money 10 years early
As government and employer-sponsored retirement schemes around the world come under pressure, individuals have found themselves increasingly responsible for their retirement savings.
However, the World Economic Forum has warned that these savings aren’t accelerating fast enough to make up for the deterioration of traditional retirement plans.
Han Yik, Head of the Institutional Investors industry at the World Economic Forum, said: “The real risk people need to manage when investing in their future is the risk of outliving their retirement savings.
“As people are living longer, they must ensure they have enough retirement funds to last them through their longer lives. This requires investing with a long-term mindset earlier in life to increase total savings later on.”
VitalityInvest conducted research in May 2019 with around 6,000 consumers to assess the state of the UK’s retirement savings. The picture the results painted was concerning, as the data showed that women’s retirement savings are set to fall short by 16 years, while men are on average likely to come up 10 years short.
So, although the average woman in the UK wants to retire at 63, if they did so their savings at retirement would run out by the time they were 69, assuming they are spending £27,000 per year (based on an average life expectancy of 85 and average savings of £392 per month).
The report concluded that, for Brits to fund their living expenses into old age, they either need to drastically increase the amount they save or continue working for significantly longer.
Why regularly monitoring your retirement savings contributions is key
According to figures in The Independent, a 25-year-old earning £30,000 and saving the minimum amount would end up with a pension pot of around £200,000 in today’s prices by the age of 65. Right now, that would buy a guaranteed, inflation-protected income worth about £6,500.
Combined with a full State Pension, it would mean living on an income of around £15,000 a year, according to figures obtained from the Money Advice Service.
If you want to save enough to see you through to the age of 100, with a salary of £20,000 (which, in addition to the State Pension takes you to the average UK salary), you’d need a pot approaching £450,000, according to The Independent.
To save the amount needed to fund an income in £20,000 in retirement from age 65 to 100, a 25-year-old would need to save £235 a month. Delaying by ten years to start saving at age 35 sees the monthly saving figure almost double to £428, and if you wait until age 45 you’d need to save £859 a month to secure the same income.
Other factors that can affect your ability to fund a 100-year life
Starting early and maximising your contributions is key to ensuring you can fund a 100-year life. The more that people can save when they are young, the more they will benefit from the power of compounding – the interest earned on interest.
However, it’s also important to consider the amount of investment risk that you’re willing to take. Younger investors should be able to take more risk as their fund has more opportunity to grow over time.
Fees can also play a part. High charges can have a negative impact on the overall value of your retirement savings, and so shopping around is crucial.
An added complication is that, since 2015, retirees have been able to dip into their retirement funds from the age of 55, further increasing the chances of their savings running out. As you approach retirement, it’s a good idea to seek professional advice to ensure that you don’t leave yourself short of income in your later years.
Another important part of the financial planning puzzle is property wealth. Your home is likely to be your biggest asset as you enter retirement and, through equity release, capital can be freed up to help fund care costs or living expenses.
However, high house prices are preventing people from getting onto the property ladder early in life, meaning many people will still be paying off their mortgage in their 60s or 70s.
Three ways to make sure you don’t run out of cash in old age
- Make a budget and stick to it so you keep to your spending limits during retirement.
- Don’t lose track of your pensions. Savers often lose track of multiple pensions during their lifetime, which could mean an income shortfall in retirement.
- Regularly review your strategy. Review your funds, provider and withdrawal strategy at least once a year. If your funds have performed well, you might be able to increase your withdrawals. If they’ve struggled, you might need to think about cutting back on your income.
Get in touch
Planning for a 100-year life is complicated. With so much to consider, it can pay to seek professional advice – and that’s where we come in. To have a chat about your retirement planning, get in touch. Email firstname.lastname@example.org or call (0161) 8080200.
A pension is a long-term investment not normally accessible until age 55. The value of your investment (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.