Why longevity is the underappreciated retirement risk

To my mind, there are two distinct stages in your financial planning lifetime.

The first requires you to squirrel away money for your future, hoping to benefit from the magic of compounding returns. I often call this the “savings stage”.

At retirement, you then transition to the “spending stage” of your life.

From this point, you will likely withdraw from, rather than continue to add to, your investment portfolio.

While any habit of frugality you developed during your life will continue to be beneficial, this major change in direction can be a difficult adjustment for you.

In this phase of life, I always flag two risks you’ll face. One is a risk I often think my clients fear a little too much, and the other is a risk I don’t think they fear enough.

Read on to discover what those risks are, and why one deserves more attention than the other.

Investment volatility is not something to fear

Like the pre-retirement investor, retirees also have an innate fear of market declines. These are periods when share and fund values fall, often due to a global crisis or worsening economic fundamentals.

The technical term this has become known by is “volatility”, describing the erratic fluctuations of market values around a typically rising baseline.

In essence, the takeaway for you as an investor is that, while markets have historically risen, they don’t do so in a straight line.

The fear for the retiree is that, while the market is experiencing a temporary decline, you will need to sell investment units at a lower price to fund your living expenses. This, all other things being equal, does have an impact on the expected lifetime of your assets. It’s a factor that you should consider, but you can also plan for it.

For example, many retired investors retain a lump sum in cash, from which they can make income drawings during times of market decline.

The reality is that temporary declines happen regularly without warning. The best way to earn the full market return is to endure these periods with patience and discipline. By planning properly, you can essentially shield yourself from permanent damage happening from temporary declines.

As I wrote in a previous article, volatility is not something to fear, a view wholeheartedly endorsed by no-less an expert as investment guru, Warren Buffett.

The effect of longevity is underappreciated

Over the last few decades, the average investor’s life expectancy has significantly increased.

A few generations ago, it was rare for a retiree to live for longer than fifteen years while relying on their investment assets. Today, thanks to advancements in medical care, better diets, and healthier lifestyles, you are now looking at a much longer potential retirement timespan.

According to Office for National Statistics data, a male aged 60 has a 25% chance of living to age 92, while a woman of 60 has the same percentage chance of living to 94.

That could easily entail more than three decades of living expenses, medical care, and unexpected emergencies that need to be funded by your pensions and investment assets.

In my experience, it can be too easy for you to vastly underestimate the risk that this poses to you in your quest to remain financially independent. The investment decisions you will need to make to provide for this period will require you to put aside other concerns, such as the innate fear of market declines, to give you the best chance of success.

The goal is three decades of a rising, inflation-cancelling income. The risk is that you focus on short-term fears that disadvantage you in the long term.

A changing landscape

The shift in focus that increasing longevity brings into play can affect your mindset as you approach retirement. It can challenge certain rules of thumb that you may have become used to.

This stresses the importance of a comprehensive retirement income plan built on evidence and rigour.

Additionally, if you are still firmly in the “savings stage” you will need to adjust your expectations concerning the appropriate amount is to save for your future self. It’s a changing world, and no one is safe from the need to adapt.

As the world continues to evolve in various ways, I will always encourage you to consider how this affects the way you are providing for your own future.

My financial planning philosophy will always emphasise regular reviews and, in this way, I hope to make sure that you are always prepared for changes that others may not yet be ready to identify.

Get in touch

If you’d like to talk through your own investment strategy, then please get in touch.

You can call me on 07769 156 250.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Equity investments do not afford the same capital security as deposit accounts.

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.