Why you need to plan for a 100-year life

October 6, 2022

As longevity improves, retirement planning becomes even more important as you can expect to spend longer in retirement than previously anticipated.

According to SingStat a woman aged 60 in Singapore in 2021 has a 65.5% chance of living to age 85, and a 5.6% chance of living to be 100.

A man aged 60 in Singapore in 2021 has a 48% chance of living to the age of 85, and a 1.6% chance of living until age 100. This means you may need to budget for at least 30 years of retirement, and in some cases up to 40 years.

So how can you ensure your savings allow you to enjoy life for as long as needed?

Use the 3 phases of retirement to guide your plans

As the graph below demonstrates, retirees’ spending tends to reduce each year from an initial high, as they enjoy new-found freedom to take holidays and indulge in hobbies and interests.

The lowest amount of spending tends to happen at around age 85, after which time new healthcare costs increase annual spending gradually once more. This is colloquially known as the “retirement spending smile”.

Source: Forbes

By understanding how you are likely to spend your money during retirement, you can make more informed choices about how much you will need to save and how to access those retirement savings throughout your life.

Read our article ‘How financial planning can help to ensure you have enough for the 3 stages of retirement’ for more information about this.

Balance legacy planning with ensuring you have enough to live on

Building up a financial legacy to pass on to your loved ones after you die is one of the things that will likely be on your wish list, with the prospect of hefty Inheritance Tax influencing how you gift this money during your life.

While it’s important to work with your financial planner to ensure you spare your loved ones from paying more tax than necessary when they receive their inheritance, consider how much you will need to retain in your own savings pot to cover your living expenses in the meantime.

It is easy to be overzealous in gifting your money when later-life care seems distant, but no matter how well you take care of yourself, it is likely that you will require help with everyday tasks as you age.

Estate planning is important, but be sure to consider it alongside a realistic forecast of your spending needs as time progresses.

Understand your options for accessing your pension

The introduction of Pension Freedoms in 2015 means you now have several different options for accessing your UK-based defined contribution (DC) pension to fund your retirement.

The first thing to note is that you don’t have to start withdrawing from your pension as soon as you are eligible (currently age 55, rising to age 57 from 2028).

If you have other savings that you would prefer to use, you may choose to leave your pension fund invested so that it could generate further returns for later in life.

Here are some of the different ways you could use your DC pension fund.

· You could buy an annuity to guarantee an annual income for the rest of your life.  

· You could take a flexible income, withdrawing as much or as little as you like, when you like. Don’t forget that as the pension fund will still be invested, its total value could fluctuate, so review this regularly with your planner to be sure you don’t overspend.  

· You could take a lump sum from your pension fund. You can usually take a 25% tax-free lump sum, with any additional amount being liable for tax at your highest tax rate.

· You could withdraw the entire sum of your pension. However, keep in mind that tax liabilities mean this may not be suitable depending on your circumstances. Usually, 25% will be tax-free, but the remainder may be liable for tax at your highest tax rate, which could be as high as 45%.

Use cashflow modelling to make an informed decision

Cashflow modelling is one of the most effective ways to plan for retirement because it uses different data points to visualise how much income you could have at any time in the future. It even allows you to analyse variables to see what the outcome might be on your finances.

For example, if you are considering semi-retirement, you might wonder how this could affect the income you will have in 20 years’ time.

By considering your current income, your projected income in semi-retirement, your expected pension contributions, and variables such as inflation, we can see what your total resources could be 20 years from now, and establish whether you’re likely to run out of money.

The cashflow forecast that is generated displays this data as an easy to read graph, so that you can see that you will have enough to last you for the rest of your life – even if you reach the age of 100. It will also indicate any predicted shortfalls in income so that you can make a plan to address them before they happen, for example by continuing to add to your pension fund for longer.

This is why a financial planner is such an invaluable part of your retirement planning: the tools they have access to take much of the guesswork out of your strategy, providing you with peace of mind knowing that you and your family have enough money to support you throughout your lifetime – however long you live.

Get in touch

If you’d like to talk about how to make sure your retirement savings will last long enough to support you, we are here to help.

Either contact your financial planner directly, email us at hello@ascentawealth.com or fill in our online contact form to organise a meeting and we’ll get in touch.