Retirees heading for life expectancy time-bomb

90th birthday cake

Retirees are being warned not to take life expectancy figures too literally when planning their retirement finances.

National life expectancy calculations from the Office for National Statistics (ONS) suggest a 65-year old woman will live to 86 while a man of the same age can expect to live to 83.

However, other mortality measures predict life expectancy differently and pension provider Aegon claims that when improvements to mortality rates over time are included into the calculations, life expectancy rises to 90 for men and 92 for women.

 

As such, those retirees who are relying on invested pensions to deliver their retirement income could run out of money if they are basing their withdrawal levels on unrealistic life expectancy rates.

To fund the additional years added to life expectancy when improvements to mortality rates are included, Aegon says a man with a pension worth £250,000 at 65 would need an additional £66,000 to finance another seven years in retirement, while a woman with the same size fund would need £49,000 to fund another six years.

However, even relying on these amended life expectancy rates could still land retirees in hot water. Analysis from Aegon and EValue show that as many as one in three women and one in four men will live to 95. Looking at life expectancy across the board, only 12% of 65-year-olds will die before the age of 80 and only 5% will die at the average age of 91 (for men and women).

The figures show how difficult it is to make meaningful financial decisions based on average life expectancy rates.

 

‘People should prepare financially to live longer’

Steven Cameron, pensions director at Aegon, says“Preparing for retirement is uniquely challenging because it involves planning an income for an unknown period of time. The pension freedoms have made it absolutely critical that advisers and their clients are using the right tools to plan for retirement, especially when it comes to estimating how long someone is likely to live. National statistics are an obvious first port of call, but they can never be more than a blunt tool for estimating individual life expectancy. 

“Advisers don’t have a crystal ball any more than retirees do themselves, but average life expectancy statistics should only ever be a starting point. Improving mortality over time could push up the average by half a decade, and people also need to factor in variations based on health, genetics and lifestyle. The upshot is that people should prepare financially to live significantly longer.

“For advisers, one solution is to focus on ‘survival probability’: the chances that someone will live until a certain age. By taking into account improving trends in life expectancy, retirees and their advisers can both agree on an acceptable level of risk that they will outlive a certain age, and plan around this.”