How long will you need your income in retirement?

How long will you need your income in retirement?

None of us have a crystal ball how long we will live in retirement, but what we all know is that most likely we will live much longer than the previous generation.

It is great news for us all, but is your money well prepared for this very long life? Will you have enough to last you your lifetime or are you risking ending up with no savings in last years of your life?

The other day I was reading a fascinating article about life expectancy, and this is exactly what inspired the topic of today: “Facts you really have to know about your life expectancy”.

Have you read this article: How long will you live in retirement? How long will your money last? 

This is one of my earlier ones, but the information is so very current, and today’s discussion although prompt by external article, continues my debate on the necessity of proper planning for your full retirement.

And not just your first years when you are healthy, vibrant, want to travel and experience life. You really need to be very honest with yourself as to the real value of your savings.

And then there is the other article of mine that touches on this very important topic: “How to prolong income in retirement without taking extra investment risk?”

Isn’t that what we all want? From my experience working with retirees for many, many years – the most requested element of finances for retirement is security of income for life.

It is not making a killing fortune, it is not growing savings no matter the risk, it is not sitting in front of computer to research investments, market trends and future market movements. It is income security, especially in difficult times.

But to achieve this, you need to be very honest with yourself, understand the level of your financial knowledge, time you want to devote to looking after your financial interests.

You also need to understand and accept the fact of longevity and your actual life expectancy, which may scare many of you in a minute.

Understanding your life expectancy is one of the most important parts of a good retirement planning and as a consequence, you have to plan your retirement income around it.

But to do this correctly, you need to know the following facts about life expectancy:

1. You underestimate how long you are going to live.
Based on recent survey, most 65-year-old believe, they will live till age of 82 for male and 85 for females, but the truth is that most will live well into our 90.
What that means is that it is more than likely that you will spend 3 decades of your life while retired. Are you prepared financially for such long retirement?

2. The average numbers of life expectancy are based on 50% success rate
Those life expectancy numbers are only based on averages. What does it mean? For example, let’s assume that for a 65-year-old, the life expectancy is till the age of 90.

Therefore, if you are trying to organise your money and you make sure you are provided with income till that age of 90, you might thing that you have done a good job.  Well…. as I said, those numbers are based on 50% success rate, meaning that 50% of us will only live till 80, while the other 50% till the golden age of 99 or beyond.

So which 50% do you want to be in? Die earlier and leave unused money behind or live longer but run out of money? My point here is that relying on those “average” life expectancy numbers might be very harmful, incorrect, and filled with flaws. It can do more harm than good for you and your planning.

3. Your life expectancy increases with you as you get older.
This one could be an eye opener, the older you get, the more your life expectancy extends.
Your life expectancy is not a static number, it changes as you age. For example, your life expectancy today as a 65-year-old male could be till age of 88.

But when you get to your age of 70, your life expectancy is more likely to be till age of 90, therefore 2 extra years that you are expected to life, that you might not have allowed for when planning your retirement finances.

4. It is very, very likely you will live longer than your life expectancy – what then?
As I mentioned before, it is at least 50% probable that you will live longer than your life expectancy.  And if you are a couple, this probability number is 70% that at least one of your will outlive your life expectancy.

And as I said in my previously in: “How long will you live in retirement?” there is also 10% likelihood that one of the members of a couple will live till the age of 99.

I wrote this 2 years ago, so the number of 99 is most likely to be closer to 100 or even above today. So if this is you, if there is a probability of you living that long, what other income will you have outside of the Age Pension? Will you have any savings left?

5. Most retirees are not confident that their money, savings, super will last as long as they are likely to live.
The survey also asked all participants how they see managing their money to cater for all those years in retirement and most said that this would be the biggest challenge for them.

Account based pension are not guaranteed, income paid is based on your life expectancy, and we just agreed that this is only 50% success rate of being correct.

I would not like to have my retirement income projections done based on 50% success rate.

Also account based pensions are design to pay your money out when you reach your life expectancy. What’s more income in account-based pension means investing into the market that can be volatile and unpredictable.

Therefore, the main task and a very difficult task of preparation for retirement and setting up your income is not to second guess, but to create an income of security that will be provided to you for as long as you are alive.

Then you can laugh at the 50% success rate of the life expectancy numbers, as you know that you do not have to guess any longer.

You will never run out of money as you have a secure income that is provided to you for life.

For most people Age Pension alone is not enough, so prepare your savings accordingly while you can and while those choices are available to you.

If you are not sure how to set it all up, just contact us, book a meeting with us.

By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement