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The Longevity March

 There are two distinct stages in an investor’s financial planning lifetime.

The first requires them to put away money for the future, hoping to benefit from the magic of compounding returns. We call this the “savings stage”.

At retirement, the investor transitions to the “spending stage” of life. From this point, they will withdraw from, rather than continue adding to, their investment portfolio. While any habit of frugality they developed during their life will continue to be beneficial, this major change in direction can be a difficult adjustment.

In this phase of life, we’ve identified two risks facing the retired investor: one risk we believe they fear a little too much, and the other risk we see them fear not enough. We’ll unpack both risks and highlight why the one deserves more attention.

Risk 1 – Volatility

Like the pre-retirement investor, retirees also may have a fear of market declines. These are periods when market prices decline, often due to a global crisis or worsening economic fundamentals.

The technical term this has become known by is “volatility” – the erratic fluctuations of market values around a typically rising baseline. In essence, the takeaway for the investor is that while the market has historically risen, it does so not in a straight line.

The fear for the retiree is that while the market is experiencing a temporary decline, they will need to sell investment units at a lower price to fund their living expenses. This, all other things being equal, does have an impact on the expected lifetime of their assets. It’s a factor that should be considered, but it can also be planned for.

For example, many retired investors retain a planned cash reserve, from which they can make income drawings during times of market decline.

The reality is that temporary declines happen regularly without warning. The best way to earn the full market returns is to endure these periods with patience and discipline. By planning properly, we aim to shield an investor from permanent damage happening at points temporary decline.

Risk 2 – Longevity

Over the last few decades, the average investor’s life expectancy has significantly increased. A few generations ago, it was rare for a retiree to live for longer than fifteen years while relying on their investment assets. Today, thanks to advancements in medical care, diets, and healthier lifestyles, a retired couple has a one-in-three chance of one of them living to age 95 (ONS).

Below we have provided ONS assessments of the potential mortality age of men and women reaching State Pension age now, at age 68.

Prediction for Men:

 Source: ONS 08/04/2024

If you want to personalise this prediction, then please use the below ONS calculator:

For the average retiree, there will be over three decades of living expenses, medical care, and unexpected emergencies that need to be funded by their pensions and investment assets. From experience, the typical retiree vastly underestimates the risk that this poses to them in their quest to remain financially independent. The investment decisions they will need to make to provide for this period will require them to put aside other fears, such as the fear of market declines, to give them the best chance of success.

The goal is three decades of a rising, inflation-cancelling income. The risk is that they focus on short-term fears that disadvantage them in the long term.

Source: Humans Under Management

A Changing Landscape

The shift in focus that increasing longevity brings into play will impact the mindsets, approaches, and rules of thumb that retirees have become used to. This stresses the importance of a comprehensive retirement income plan built on evidence and rigour.

Additionally, those who are still firmly in the “savings stage” will need to adjust their expectations for what the appropriate amount is to save for their future selves. It’s a changing world, and no one is safe from the need to adapt.

As the world continues to evolve in various ways, we encourage you to consider how this impacts the way you are providing for your own future. Our financial planning philosophy will always emphasise regular reviews, and in this way, we hope to make sure that our clients are always prepared for changes that others are yet to identify. Thus, we will continue to assume a mortality age of 100 for all of our clients.

This Briefing is intended only for clients  and prospective clients of our practice. It is designed to inform, educate, and entertain. It does not constitute advice. If you would like a detailed discussion of your financial planning, or any other point raised here, then please do not hesitate to contact us. Please note that past performance is not necessarily a guide to the future and investors may not get back the amount originally invested as the value of any investment and the income from it is not guaranteed. The Financial Conduct Authority do not regulate taxation advice. The tax treatment of investments depends on individual circumstances and may be subject to change in the future. The value of your investments can go down as well as up, so you could get back less than you invested. A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of fund when accessed, interest rates and legislation.