Retirement and how we manage it has changed. There are many reasons for this.
- Increased life expectancies
- Changes in the State Pension
- Higher inflation
- The move from using Annuities to the Approved Retirement Fund
The increase in life expectancy is quite dramatic. In 2021 global average life expectancy was just over 70 years. 200 years ago it was just under half that. Source: ourworldindata.org
In Ireland life expectancy at birth has increased consistently for both men and women since the first life table was compiled by the Central Statistics Office in 1926. In that year males had a life expectancy at birth of 57.4 years while it was slightly higher for females at 57.9 years. In 1972 the figures were 68.8 and 73.5 years. By 2017, they had increased further to 79.6 years for males and 83.4 years for females. Source: CSO.ie These increases are very substantial and have major implications for retirement planning. As recent as 40 years ago a person retiring at age 65 could look forward to an average of probably another eight years of rest. In 2023 that person is looking at an average of 17 years and to be prudent should fund for at least 25 years. Because of the increased possibility of one person out of two living beyond average life expectancy, a couple on average would need to fund until age 99 in order to have a reasonable expectation that the expenses of the longer life are met.
Changes in the State Pension
Longer life expectancies also have implications for the level of state support you can expect during your retirement. We often hear reference to government debt but very little mention is given to the future state pension liability which is substantial. Between now and the year 2050 the proportion of the population who are aged over 65 will double. There have already been changes to the state pension and there will surely be more to follow. While we don’t expect it to be abolished we believe that it’s value in real terms will reduce in the future.
The era of low interest rates and inflation has passed. It’s quite possible that people alive today may never witness the kind of economic environment we have had for the last two decades. Inflation is noticeable in your shopping basket even when levels are low. The intersection of longer life expectancies and higher inflation means that retirees will need to adopt a different strategy regarding their retirement assets.
The move from Annuities to the ARF
The introduction of the Approved Retirement Fund (ARF) in 1999 means that people now have the option to keep their funds invested in the market post-retirement. In recent years most people have chosen this over annuity purchase. A male aged 65 could currently obtain a joint life index linked annuity rate of about 3.43%. While annuities have their place very few people have chosen them in recent years, preferring instead to preserve capital to be passed onto dependants on death by investing in an ARF.
Is Your Adviser Switched On To The New Reality?
When selecting an adviser to guide you in your retirement planning you need to be sure that they are aware that the way they managed pensions twenty years ago will not work in 2023 and beyond. While people have traditionally invested their retirement pot in lower risk funds and have typically had a very simple investment strategy, going forward this will be a luxury which will only be viable for the very well off. Most of us will need to take more risk and in order to do so we will need to have an investment and withdrawal strategy to help us manage this risk.
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© Highfield Financial Planning 8 December 2023
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