Whilst living only off the income generated by our investments is the next safest option to buying an annuity, the income generated may not be enough to cover our planned expenditure.
Unless you have saved very diligently for retirement, or plan a relatively modest lifestyle, your retirement income will need to include a gradual withdrawal of capital as well as the investment return. The great majority of people fall into this category.
Taking income by cashing in a part of your capital introduces extra risks:
The investment income you make declines as you spend your capital, because there is less capital left from which to earn income;
If the capital value of investments falls, you can cause significant damage to your long-term financial security by continuing to cash in part of your capital to pay for your expenditure; and,
By spending your capital, there is a risk that you will outlive your savings.
The starting point for gradual withdrawal of capital is to understand how long your money needs to last, and that will be determined by how long you live.
How long does your money need to last?
Your money needs to last as long as you and your financial dependants. Whilst this is impossible to know in advance, you should still set a fixed term over which you plan to run down your savings to zero.
The following graphs show the distribution of deaths by age for male and female annuity purchasers:
The above graph illustrates that 31.7% of male annuity purchasers live longer than age 89.
The above graph illustrates that 36.9% of female annuity purchasers live longer than age 90.
As you can see, the median age when most men die is 89 and for women, age 90. However, nearly a third of male annuity purchasers live beyond 89, and nearly two-in-five female annuitants live beyond 90.
That means you could have to make your money last quite a long time.
The main factors that influence how long you will live are:
Wealth is the strongest indicator of how long you are likely to live – in the above example, annuity purchasers have saved throughout their working lives are therefore wealthier than those without savings. They therefore live longer than the general population, which includes a mix of savers and non-savers.
How long your parents lived – if your parents lived into to their late 80s or 90s, there is good chance that you will too.
Whether you smoke.
How healthy you are at retirement, and how healthy your lifestyle is, for example what you eat and how much exercise you get.
Where you live – for example, using national average life expectancy data, 65-year-old men in Harrow, Middlesex live six years longer than men of the same age in Glasgow City and 65-year-old women in Camden, London live five-and-a-half years longer than women of the same age in West Dunbartonshire.
If all these factors are positive, there is a very strong chance that you will live into your 90s and you should plan to make your money last that long. For example, if you retire at 65, your retirement savings may need to last for 30 years or longer.
Making sound financial plans is important and the decisions you make can be life changing. If you need support, you may wish to speak to a financial adviser. If you do not have one, you can find one near you at www.unbiased.co.uk. Whatever advice service you choose, there will be a charge. The amount and payment terms will be explained to you by your adviser.
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