The least understood and most underestimated variable in retirement income and wealth planning is longevity. Our thinking about this can make the difference between, “The people outliving the money and the money outliving the people”.
A normal Baby Boomer couple – or even a Generation X couple – may be unconsciously assuming that longer life has to do with discoveries in medicine that aren’t repeatable, but they are almost certainly wrong. While there is evidence to suggest that acceleration in life expectancy is slowing, the uptrend in longevity is neither discontinuous nor exponential.
Since 1841, it has been rising at a steady 40-degree angle.
My grandfather, Edwin Stinchcomb was born in 1914 and was the brother and youngest sibling to seven sisters. His father, Richard Stinchcomb, died whilst he was just months old. His mother, Mary Jane Stinchcomb, was the first to be killed on the night of 24th and 25th June 1940 during the first Bristol Blitz of WWII. His life expectancy at birth was 52. His son – and my Dad – Peter Stinchcomb, was born in August 1940 in an air raid shelter during WWII; his life expectancy at birth was 62. I was born in 1967 (hard to believe I know) just after the Beatles released “Sergeant Peppers”. My life expectancy at birth was 69 (now 81 having reached 50 last September).
Part of the explanation is the advances in medicine. Fewer people die of the flu in the UK than they did 100 years ago. A generation later, we get a flu jab every year; job done (I am not including ‘man-flu’ which has no known cure, as we all know). Few, if any, die of tuberculosis now. My Dad’s cousin had polio. He survived, but many died. Cases of polio in the UK fell with vaccinations in the mid-1950s and there hasn’t been a case of polio in the UK since the mid-1990s.
There’s something about this uptick in life expectancy that seems to pass people by. I can be talking to a couple of 60-year-olds about her 87-year-old mother who’s still going strong, and suddenly I realise that they’re not extending that same thought process to themselves, thirty years from now.
I’m not alone in this observation in human nature. The Institute of Fiscal Studies (IFS) found that those aged in their 50s and 60s underestimate their chances of survival to age 75 by about 20% and to 85 by around 5% to 10%. Men born in the 1940s when interviewed at age 65 considered that they had a 65% chance of making it to age 75, far lower than the official estimate of 83%. For women, the figures were 65% and 89% respectively.
Some groups are more pessimistic than others about their survival chances. Widows and widowers at age 60 think they have a 49% and 39% chance of reaching 80 respectively: while their official chances of surviving to age 80 are 77% and 67%. People in their 70s and 80s are over-optimistic about the likelihood of living to age 90 and beyond.
Also, joint life expectancy isn’t intuitive. We only think in terms of our own life expectancy. Who told us at school that the life expectancy of a couple in retirement is more important than that of either person? Who told us after school for that matter? Yet, the success or not of a sustainable withdrawal strategy – and therefore dignity and independence in retirement – surely depends on knowing this.
We use financial forecasting, lifetime cashflow and sustainable income tools to help us expose and make clear any bias or false optimism about how long we might live and the effect on our finances – usually shown in red bars on a chart!
So, what are the implications?
First, the conventional wisdom regarding retirement portfolios needs to be questioned. Living longer suggests – and indeed demands – that as the length of time increases over which we need a rising income, the more that fixed interest investments become “risky” and shares become “safe”. A couple who retire at 60, with the second death occurring at 95, will experience a near-tripling of their living costs. The income from a capital sum, frozen in a portfolio of fixed income securities (“bonds”) will never cover that. On the other hand, cash dividends and capital growth from shares have proven to be a reliable hedge against rising living costs. Once you begin to rationally define true long-term safety in terms of purchasing power, bonds are “risky” and shares are “safe”.
When people are too pessimistic about their chances of living through their 50’s, 60’s and 70’s they may save less during their working lives and spend more in the earlier years of retirement than they should and find they outlive their money.
On the other hand, people who overestimate their survival chances at the oldest ages – their 70s and 80s – may show an undue reluctance to spend near the end of life. They risk missing out on experiences, comfort, goals and dreams by limiting themselves to a lower standard of living in retirement than is necessary.
We don’t know how long we’ll live. There are no facts about the future. However, we can test financial planning on empirical evidence of longevity, asset class returns and inflation over multiple three-decade retirement periods since 1900. This will get us closer to what reality might look like to start with. And then with a “Land”, “Sea” or “Air” Progress Review Programme, we can help you chart a course to a successful comfortable retirement – and remain comfortably retired.
A continually increasing lifespan is indeed more than an abstract statistic – it is the central variable in our financial lives.
Do you know exactly how much money it’s going to take for you to be able to retire comfortably – and to remain comfortably retired?
If the answer is, “No”, there is no shame in that (few people know the answer). It’s not merely the honest answer, it’s a brave answer.
That being the case (if it is), would you like me to sit with you to help you work it out – understanding that there’ll be no cost to you in my doing so and nor any obligation?
Just give me a call, drop an email or pop in.
Until the next time, let me leave you with this quotation:
“Go confidently in the direction of your dreams! Live the life you’ve imagined.” – Henry David Thoreau.
Certified Financial Planner™ professional
Chartered Wealth Manager™
Investors should remember that the value of investments, and the income from them, can go down as well as up. This update has been produced for information purposes only and isn’t intended to constitute financial advice; investments referred to may not be suitable for everyone.