Retirement planning is littered with risks and unknowns that advisers and clients need to navigate carefully.
What will the impact of inflation be? When will interest rates start to creep up? How should you react in the event of a significant economic shock, such as the great market crash of 2007?
Hanging over all of these uncertainties is an overarching risk that must always be front and centre of retirement planners’ minds: longevity.
I say “risk” – of course, in reality, most of us view the main “risk” of longevity as dying earlier rather than later! But when it comes to retirement planning making sure your money lasts as long as you is the name of the game.
As one industry luminary joked to me: “In an ideal world you want your final cheque to the funeral director to bounce!”
But with the pension freedoms causing a boom in drawdown, how often will this really be the case?
I hope I’m old before I die
Robbie Williams once crooned about his desire to be old before he dies, but most people don’t want to think of their eventual demise at all – let alone spend time considering how they will ensure their retirement pot doesn’t kick the bucket first. It is, therefore, unsurprising that, when asked, savers appear to be getting it wrong on life expectancy.
AJ Bell surveyed 250 people aged 55 and over who had entered income drawdown since the pension freedoms launched in April 2015 and asked how long they thought their pension income would need to last.
The results were striking, if unsurprising (see Table 1). Exactly half (50%) of respondents aged 55-59 thought their pension would need to last 20 years or less, with almost a quarter (24%) of this group thinking it will need to last for 10 years or less. Interestingly, almost exactly the same proportion of 70 to 74-year-olds (25%) think their retirement income will need to last for 10 years or less as 55 to 59-year-olds – despite the fact they’ve racked up 15 extra years of living!
Table 1: How long do you anticipate your pension income will need to last for?
| 55-59 | 60-64 | 65-69 | 70-74 | 75+ | |
| Less than 5 years | 9% | 11% | 2% | 5% | 18% |
| 5 – 10 years | 15% | 10% | 6% | 20% | 18% |
| 11 – 15 years | 9% | 10% | 15% | 20% | 27% |
| 16 – 20 years | 18% | 16% | 28% | 15% | 27% |
| 21 – 25 years | 18% | 30% | 17% | 15% | 0% |
| 26 – 30 years | 15% | 13% | 20% | 10% | 0% |
| 31 – 35 years | 6% | 4% | 2% | 0% | 0% |
| 36 – 40 years | 4% | 1% | 1% | 5% | 9% |
| More than 40 years | 7% | 4% | 7% | 10% | 0% |
| NET : 1-20 years | 50% | 47% | 52% | 60% | 91% |
| NET : 21-40 years | 43% | 49% | 41% | 30% | 9% |
| Life expectancy*: | |||||
| Male | 82 | 83 | 84 | 85-86 | |
| Female | 85 | 85-86 | 86-87 | 87-88 | |
| No of years to live | |||||
| Male | 27–23 | 23-19 | 19-15 | 15-12 | |
| Female | 30-26 | 25-22 | 21-18 | 17-14 |
Note: The sections highlighted in red indicate where respondents’ estimates of how long their retirement income will need to last are below average life expectancy.
Given that average life expectancy for this cohort of savers is 82 for men and 85 for women it doesn’t take Einstein to work out that if the savers aged 55 to 59 apply their life expectancy guess to their income strategy, a decent number will risk running out of money in retirement.
Furthermore, the reality is that nobody knows when the grim reaper will come knocking and there’s a fair chance – depending on your health and lifestyle – that you’ll still need an income past your 90th or even your 100th birthday.
How much are people taking out?
To get a clearer picture of how people are behaving, we asked the same 250 drawdown investors what percentage of their fund they are taking out each year.
The research shows 57% of people in the 55 to 59 age bracket are withdrawing more than 10% of their fund each year. This reduces to 43% of people in the 60 to 64 age bracket and 34% of people in the 65 to 69 age bracket.
The average fund value of the people questioned was £118,000. A 10% withdrawal of that initial fund value each year (£11,800) could result in the income lasting for just 12 years. If that withdrawal is reduced to 6% of the starting fund value the money might last for 29 years. (See Table 2 below).
Table 2: How quickly £118,000 pension fund will run down based on different withdrawal levels. Assumes 4% investment growth per annum post charges.
| Year | 4% withdrawal (£4,720) | 6% withdrawal (£7,080) | 8% withdrawal (£9,440) | 10% withdrawal (£11,800) |
| 5 | £116,977 | £103,684 | £90,390 | £77,096 |
| 10 | £115,733 | £86,265 | £56,798 | £27,330 |
| 15 | £114,220 | £65,074 | £15,928 | |
| 20 | £112,378 | £39,291 | ||
| 25 | £110,137 | £7,922 | ||
| 30 | £107,411 | |||
| 40 | £100,059 | |||
| Year money runs out | 83 | 29 | 16 | 12 |
The research also suggests that half (53%) of people do not know how their pension fund is invested and a quarter (26%) never review the amount they are withdrawing.
A jumble of risks
It’s worth remembering the analysis in Table 2 does not take into account the deleterious impact of inflation – currently running at 3% – nor the sequence in which returns are achieved. Both could potentially have a huge negative impact on the sustainability of a retirement income strategy.
Furthermore, spending patterns are unlikely to be static for most people, with many likely to prefer spending more in the early years when they are more active and potentially having to factor in long-term care costs for later years.
Ultimately what we have here is a complex, jumbled mess of uncertain outcomes and confused consumers facing risks they have never even contemplated before. While many will – either by luck or good judegment – achieve a good outcome, those who don’t engage risk falling short.
In such an environment regulated financial advice could not be more valuable.
Tom Selby is senior analyst at AJ Bell
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