How life expectancy shapes retirement planning and pension decisions
By thinking about how long you might live for and, more importantly, how long your retirement might last, you can get a much better idea of what you need to prepare for to ensure you have the type of retirement you want.
It may seem morbid to think about, especially if you’ve only just started contributing to your pension, but understanding how life expectancy relates to your pension is important if you want to ensure you get the most out of your retirement. By thinking about how long you might live for and, more importantly, how long your retirement might last, it can give you a much better idea of what you need to prepare for to ensure you have the type of retirement you want.
How does life expectancy affect retirement?
Over the past several decades, life expectancy in the UK has risen significantly. In the 1950s, the average person typically lived only a few years beyond the State Pension age. Today, many people are likely to spend 20 to 30 years in retirement. This shift has transformed the way we need to think about pension planning, retirement income, and the choices we make when accessing pension savings. Simply put, the longer you live for, the more years of retirement you’ll have to fund.
The impact of changing life-expectancy
Though the concept of retirement, and receiving a pension, have existed for a very long time, the realities of retirement have changed dramatically since even TPT was established in 1946.
In 1951, the state pension age was 65 for men and 60 for women. According to the Office for National Statistics, the average life expectancy at birth in the UK at this time was 66 for a man and 71 for a woman, which meant that the average man could expect to live for just one year after reaching their state pension age, with women expected to live for 11 years after reaching their state pension age.
Today the story is quite different. The state pension age is currently 66 for both men and women but average life expectancy is now around 79 for men and 83 for women. This means the average man is expected to collect their state pension for 13 years, while this number is now 17 years for women. Indeed, if you’re hoping to retire before state pension age you could well be looking at spending 20-30 years in retirement, or even longer if you’re in good health!
This means that retirement now spans a far greater portion of life than it used to, savings need to last longer and decisions about how to access pension pots play a much greater part in ensuring a comfortable retirement.
How can I calculate my life expectancy?
While national averages are useful, an individual’s life expectancy can differ significantly based on a variety of factors. Of course, it’s impossible to know exactly how long you’ll live for. But factors such as your gender, lifestyle and family history can help build a picture of what your life expectancy could be.
If you come from a long line of nonagenarians, then there’s a higher-than-normal chance that you might also live until you are 90. But if you are a heavy smoker and drinker then you have a much higher chance of developing medical conditions that could shorten your lifespan. And of course, it’s possible you may already have been diagnosed with a medical condition that may impact upon your life expectancy.
Because individual circumstances vary so widely, a life expectancy calculator, such as this one provided by the Office for National Statistics, can be a good way to get a personalised estimate. While no calculator can predict the future with certainty, they can provide a helpful baseline for planning. Even a rough sense of how long retirement might last can be valuable when making decisions about your retirement.
How life expectancy can influence pension decisions
Beyond simply thinking about how much you might need to save or invest in order to fund your retirement, there are a number of ways you can choose to take your defined contribution pension and anticipated life expectancy can play a big part in this decision.
A popular way of taking a pension is flexi-access drawdown, which is where your pension stays invested and you withdraw income as needed. Knowing your potential life expectancy can help you set sustainable draw rates and help ensure you don’t underestimate your life expectancy and run out of money.
Some people choose to withdraw all their pension savings at once in a single lump sum. For many people, lump sum withdrawals can carry the risk of exhausting savings too quickly – but if you expect to have a shorter-than-average retirement then it may make more sense for you to have access to all your pension at once.
By contrast, an annuity converts your pension pot into a guaranteed income for life, with longevity being a key factor. If you live for a long time, an annuity can provide excellent value but if you don’t live as long as expected it could mean that you don’t receive as much retirement income as you otherwise might have if you opted for another option.
Why understanding life expectancy matters
Retirement planning is ultimately a balancing act between enjoying your savings while you can, while avoiding the risk of depleting your pension too early.
By having a clearer idea of your potential lifespan, you can make more informed decisions to help you make the most of your retirement.
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