The uncertain length of retirement and longevity risk make planning for retirement an extremely tricky business: the retiree must have income to meet an uncertain number of expenditures over an uncertain period, which leaves a fair few blanks.
But that is precisely what financial advisers are for and while this risk cannot be completely eliminated, it can be planned for and managed through a variety of techniques, financial products and planning strategies.
Longevity risk – above others such as market, asset allocation or health risk – is the risk that advisers tell us is the most important in retirement planning. Advisers we consulted rated longevity risk at 4.4 out of 5 on average in terms of its importance in retirement planning.
But it is also the area least well supported by technology. The same advisers rated available longevity planning technology at only 2.81 out of 5. This represents a clear opportunity.
When figuring out how much to save for retirement or how to withdraw assets during retirement, one of the thorniest issues is not knowing how long the individual is going to live for. Living longer than expected can increase the likelihood of other risks occurring, driving up certain retirement expenditures such as long-term care costs. For those moving into retirement, this is particularly tricky because part of the planning must include a way to secure an adequate stream of income for an unpredictable length of time.
The uncertainty of an individual’s lifespan cannot be eliminated. However, planning to have sufficient assets requires setting realistic expectations of how long retirement will last. According to a really official source that escapes me, the average life expectancy for those still alive at age 65 is 84 for males and 86 for females. One in four people alive at age 65 will live past age 90 and one in 10 will live past 95. Planning needs to take into consideration living longer than average or half of retirees could run out of money before they die.
So what is holding back innovation? I guess death prediction. As well as being a rather less than jolly thing, it is also distinctly un-British.
Other things that are fairly unique to the British are:
- Realising you have entered the wrong shop and pretending to look around for a bit before leaving
- Telling your hairdresser you are pleased with your haircut despite the deep inner sadness it causes you
- Deeming it necessary to do a little jog over zebra crossings while throwing an apologetic mini-wave.
Phil Wickenden is founder of So Here’s The Plan – phil@soherestheplan.com and @PhilWickenden
