As life expectancy increases, so does the length of time needed to stretch your income in retirement. Taking the right steps now can help you afford the lifestyle you want for as long as you need, says Kevin Cassar.
Today, people can expect to live into their 70s and beyond, as life expectancy continues to rise. The European Commission’s 2015 Ageing Report predicts men are, on average, likely to live an extra seven years by 2060 to reach 84, and women an extra six years to reach 89.
While this is generally a positive trend, it comes with some downsides at both personal and state levels. Simply put, can we afford the cost of living longer?
From a personal point of view, you can start gauging whether your resources are on track to last your lifetime by considering some key questions.
How long will you need your money to last?
This is a sobering question and not one most people can answer with certainty. Underestimate this, however, and your money could run out too soon, leaving you unable to live the lifestyle you want. No-one wants to be forced to reduce their quality of life or benefits like private healthcare, especially in their later years.
How much will you need?
If you are happy with the income you are receiving now, you probably have your answer. You may want just enough each month to live comfortably, or a bit extra so you can afford some luxuries. You might even settle for a modest income so long as you have access to ‘rainy day’ funds.
You might even settle for a modest income so long as you have access to ‘rainy day’ funds
If you are still employed, you need to consider what happens when you stop working. Will your pensions or savings be enough to replenish that income and sustain your existing lifestyle? Does it need to, or will you cut back when you retire?
Do not underestimate inflation here too. While it is tempting to go for low-risk investments in your later years, your capital still needs to keep pace with inflation, and cash in the bank is unlikely to do this.
Say, for example, you typically spend €5,000 a month. Assuming an inflation rate of three per cent a year, in 10 years’ time you could need about €6,720 a month to maintain the same spending, and €9,030 in 20 years.
How much do you want to leave behind?
You also need to consider your legacy. If you want to leave something to your family, you need to make sure you do not spend it in your own lifetime, without compromising your quality of life.
You can even take steps to reduce the amount your heirs will have to pay in inheritance tax and maximise the value of your legacy.
Making your pension savings and investments last
Your pension is a key part of your financial security in retirement. If you are relying on your pension savings to provide an income for life, you need to be sure that whatever you decide to do now will leave enough to go the distance. Remember, you could live for 30 years or more after you reach pensionable age, so it is never too late to make provision for this.
One side-effect of rising life expectancy is a general trend for tax rises. That’s because the greater the proportion of older people in a population, the more money the government needs to pay for State pensions and services like healthcare.
Hence, it’s important to make sure your savings, investments and assets are also working as hard as they can for you and that they are protected from unnecessary taxation and economic shocks. Relying solely on your State pension is not an option. We recently witnessed the events in Greece as entitlements have been cut at least 10 times while the pension system has been reformed at least four times since 2010.
To achieve good financial and estate planning, it is essential to take personalised, professional advice. It is never too late to make provision for your retirement so that in the years to come you can focus on enjoying the long, comfortable retirement you always wanted.
www.blevinsfranks.com
Kevin Cassar is regional manager at Blevins Franks.