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Long life, short change – will you run out of money in retirement?

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Will your pension pot run out before you die? Financial writer Kara Gammell explains why you should plan for longevity rather than early retirement to help your money last longer 

Think about how long your retirement savings have to last when planning for the future Britons are living longer than ever before. According to data published by the Office for National Statistics (ONS), there are now half a million people over the age of 90 in the UK - almost three times the number in 1985.

What’s more, the number of people over the age of 100 is also rising, up 65% in the last ten years, with 14,570 centenarians in 2015.

But while everyone would love to live as long as possible, the reality is that growing old is an expensive business – and you need to ensure you have enough money tucked away.

As life expectancy increases, the average time spent in retirement is nearly 20 years – more than double that of our grandparents: so anticipating how long you will be retired is just as crucial as planning when you will stop working.

Do the maths in advance

While most of us put money away for retirement, the reality is, we have no idea how long this will be needed.

“The trend of people living longer is showing no sign of slowing down. The average life expectancy is now in the mid-eighties and more and more people are hitting the magic hundred mark than ever before,” says Bob Stark, director at Portafina, a pension advice company.

Bear in mind that while we are all living longer, women continue to outlive men. According to the ONS, 2015, nearly three-quarters of those aged 90 and over were female . 

But research from Aegon, a pensions and investment company, has found that a quarter of those aged over 75 have not made any pension provision for their spouse in the event of their death .

“This can create challenges for couples planning their joint retirement finances,” says Steven Cameron, pensions director at Aegon. “Given that in older generations, it has typically been the man who was the main breadwinner, this can lead to an income shortfall for their surviving widows in later life.”

You can use the Office of National Statistics calculator to estimate how long you might live. But while this can help you plan how long your pension may need to last – it can only generate a ballpark figure as lifestyle choices and other factors will play a big part. Check out your life expectancy projection at bit.ly/1Lau5pB.

Don’t forget about care costs

Longer average life expectancy also masks whether or not individuals are in good health – and a growing number of retirees are set to face the challenge of funding care costs from their savings.

Research from LV=, a pensions and insurance company, has found that many people going into care could face bills that will be greater than the size of their total pension pot. Over the last decade the average length of stay in a care home has increased by 13% to two years and seven months, and will cost around £75,000.

“As the number of people reaching very old age rises, the pressure on their finances to cover care costs can only increase,” says Cameron. 

“Increasingly people should budget for a retirement in which their income needs are high not only in the active early phase of retirement but also again in later life.”

How will working patterns change? 

When it comes to your retirement fund, you need to think about how to make the money last – and how you can make this happen.

This is often easier to achieve as you age, as you’re likely to have a clearer sense of your needs and fewer financial commitments, says Mark Butterworth, Head of Technical Services at Skipton. 

“With some of your previous financial priorities out of the way, you may be able to focus on building a retirement pot that enables you to fulfil your objectives.

“In the run-up to retirement, you should be aiming to review your pension on a regular basis. Doing so will give you the chance to make changes that could have a bigger impact. It’s also really important to start thinking about how you will use your pension to fund your retirement – as it might influence how you position it in the final few years of working.”

But knowing how long your money needs to last also depends on when you want to start taking it and what your future plans may be. For some, this may be early retirement, while others will want to continue working after reaching the State Pension Age.

A growing number of people are choosing to phase their retirement. Figures from LV= show that one in seven people approaching retirement opt for semi-retirement and gradually reduce the number of hours they work, rather than a ‘big bang’ of working one day and being retired the next. But one in 10 of those continuing to work over 65 say that they do it because they need money.

How to avoid a pension shortfall

There are now more options than ever before to provide a mix of guaranteed income and flexibility to allow you to vary your retirement income to suit your needs. The key is to be realistic and honest about what you can sustain before you commit to retiring, and then to plan ahead so you can enjoy what will hopefully be a long and relaxed future.

Mark says there are three levels of financial security in retirement. “The first, ‘basic’, is where you have no anxiety about everyday bills and being able to afford where you live. Above that is ‘comfortable’, where you are able to manage financially and even afford the odd treat such as meals out and an annual holiday. Finally there is ‘desirable’, where you have the security to be able to choose where to live and what to do in retirement. 

“Ideally, most retirees would want to reach ‘comfortable’ status at the least. However, the sad reality for many people retiring soon is they will only be able to enjoy the basics.

The best advice for making your savings last longer is to plan carefully, and take professional advice if you need to, as early as possible. 

With proper advice and planning you can then work out what you need to do to realise the lifestyle you want as you get older.  

Retiresavvy is brought to you by Skipton Building Society. This article has been commissioned by retiresavvy and any opinions voiced are the author's own.

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