As life expectancy continues to rise, we may need to closely review our retirement goals and funding to ensure we don’t run out of money in later years. Cash flow modelling can help us identify any potential shortfalls by plotting out a range of life stages and objectives. So it could form the backdrop for an action plan that aims to achieve the retirement we want.
We have to be realistic when it comes to retirement planning. Life expectancy has increased significantly in recent decades. The number of people living to 100 rose from an estimated 3,000 in 1983 to 14,500 in 2016, and is projected to reach 83,300 in 2039 (1).
People who underestimate how long they will live after they retire run the risk of running out of money. They could end up wholly reliant on their state pension.
Some couples in their mid-fifties hoping to retire in the coming years are often surprised to find they lack the financial means to do so. They may own a valuable house and have a decent pension, but they wouldn’t be able to keep up their current quality of life if they retired today.
So how can people prepare for a long retirement? What factors must they think about to help ensure they’ll have sufficient funding?
We often assess our retirement needs purely financially. We might think that, if we have a certain annual income level, then that will meet our needs. But this way of thinking can overlook our goals, which could be reached with lower funding. Furthermore, these goals can alter during retirement.
For example, many of us will be active in the first phase of our retirement. In this period, we may want to make the most of better health by going on frequent holidays. But this will involve spending lots of money. So we could need more money in our early retirement than we might do in our eighties, when we may be starting to slow things down.
We may seek stability and comfort in our nineties. But financial demands could potentially go up again, due to possible nursing home or domestic care costs.
We may also have further goals, such as holding rainy day cash. And we may perhaps want to pass on wealth to loved ones.
Financial advisers can help you plan for these kinds of goals via cashflow modelling, which enables them to plot out a range of life stages and objectives. Cashflow modelling is a way of showing your potential total income and outgoings, including taxes, each and every year into the future. It can be helpful in assessing whether or not you are on track to meet your objectives.
Cashflow modelling can help you to spot any possible future funding shortfalls, including the risk of running out of money. It can be used to potentially alter your lifestyles and plans in line with these risks. So you may want to save more or start saving earlier to meet a retirement goal, perhaps by reducing your spending while you’re still working full time. For example, buying less expensive cars while in employment could potentially leave you better funded for retirement.
Moreover, you could work part time instead of stopping work altogether or you could stay in full-time work for longer. You might even decide to move to a smaller home or perhaps begin a second career in later life.
But changing circumstances could lead you to alter your financial plans in retirement. For example, inflation could potentially erode the real value of your income and assets, or you may experience a financial shock. Alternatively, you could come into a windfall, such as an inheritance.
We believe the main thing is to set out your objectives, and make use of cashflow modelling to assess how you can aim to get there. At Lloyds Wealth one of our principles is to take regular financial reviews. Regular reviews with an adviser could potentially help you achieve your goals all the way through to what may well be a long retirement.
(1) www.ons.gov.uk, ‘What are your chances of living to 100?’, 14 January 2016.
Any views expressed are our in-house views as at the time of publishing.
This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or part) without our prior written consent.
In preparing this article we have used third party sources which we believe to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents in relation to specific situations and particular circumstances.
Fees and charges apply at Lloyds Wealth.
