How long will you be retired? Planning for the unknown

How long will you live?

For most of us, the closest we can get to the right answer is an educated guess. But where does that leave us when planning for retirement?

There are two sides to every story, and this one is no different. Many people underestimate their life expectancy, but at the same time, the average length of life has begun to decrease in parts of the UK (Source: ONS).

Both overestimating and underestimating your life expectancy will have consequences. But careful financial planning can offset those and ensure that your finances are optimised to suit you, however long your retirement may be.

What happens if you live longer?

If you underestimate your life expectancy and plan for fewer years than you need, you risk:

  • Running out of money

Spending too much, too soon, could see you struggling financially a few years into retirement. To make your money last, you should calculate your life expectancy and ensure that your retirement income can be sustained beyond that age. You can find out your life expectancy based on national averages using this calculator.

  • Being unable to recover from financial shocks

If you have planned for a shorter retirement, you may end up struggling to make ends meet in later life, which could leave you in a dangerous position if you suddenly need to find the money to pay for care or assisted living arrangements.

  • Taking the wrong type of retirement income

Planning for an unrealistically short retirement could mean that you withdraw all your pension and live on a very comfortable income for a few years, only to face financial hardship in later life.

It’s more sensible to analyse how much you can afford to live on and how long you will need your capital to last. The answer to this will be different for everybody, but it is something which needs careful consideration.

Planning for the unexpected

None of us knows what the future has in store. Retirement can be cut short for a variety of reasons. Whilst it is not a pleasant thought, it is important to make sure that there is a plan in place, should you fall ill or die sooner than expected.

Without this plan, you run the risk of:

  • Dying intestate

If you do not have a valid will in place when you die, your belongings, assets and money will be divided according to the laws of intestacy. This process can be lengthy, stressful for loved ones and may mean that your estate benefits people you didn’t intend it to, whilst those you wanted to benefit, are left with nothing.

Having no will in place also means that your beneficiaries will have tough decisions to make about funeral arrangements and, if it is not written down, they may not know, or follow, your wishes.

  • Leaving your loved ones with a tax bill

Inheritance Tax (IHT) is due on the value of an estate above £325,000 (or £650,000 for married couples). Although, this will increase where the Residence Nil Rate Band is applicable.

However, with careful financial planning, including a will, it is possible to reduce the amount of IHT your loved ones will have to pay. But, unless you take action, your loved ones could lose a large chunk of their inheritance to the tax man.

Four key things to include in your retirement plan

To build a retirement plan which works for as long as you are retired, you should include:

1. An understanding of the income available to you

This will include your savings, investments and pensions. You can calculate how much you will get from the State Pension here and use this as a foundation for your retirement income.

Use a retirement income calculator to determine how much you will need to live your desired retirement lifestyle and see whether you are on track to have enough.

2. A Will

Ensuring that your wishes are known is important, especially when you are no longer around to dictate what happens to your belongings. Having a valid will in place means that you can direct any remaining capital to the person, people, or causes of your choice. It is a factor in reducing your family’s IHT bill and allows you to leave care instructions for any dependents or pets you have.

3. Reserves

With the average cost of care breaching £1,000 per week (Source: UKcareguide), it is vital that your retirement plan accounts for these expenses, as well as having an emergency fund to cover unexpected costs, such as replacing an appliance, or repairing your car. Having extra capital available also offers peace of mind that you will not be left in trouble if something breaks or you fall ill.

4. Lasting Power of Attorney

Appointing someone to take care of the important decisions on your behalf in later life, will mean that your health and finances will be looked after by someone you trust and who is acting in your best interests. Without this protection, you risk losing money, as decisions will be made during a period of ill health and limited ability. Retaining full power over your money at a vulnerable time also puts you at a greater risk of being a victim of fraud.

The importance of financial planning

Talking to a financial adviser will allow you to break down your retirement goals and enact a plan which will keep you financially stable throughout your post-working life.

To discuss this in more detail, please get in touch with us on 01664 77 88 99.