The Problem with Pensions: No One Knows How Long They’ll Live
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Making the right investment choices shouldn’t be
Unfortunately, when it comes to forecasting how long your retirement will actually be, it’s a lot less predictable. The value of
There is some statistical basis that can give an indication how long a newly-retired 65-year old can expect to live. However, recent research conducted by the Institute for Fiscal Studies shows that we tend to either over or underestimate our life expectancies. The average 65-year old estimates their chances of still being around a decade later at 65%. The reality is that the chances are actually 83% for men and 89% for women. That inaccuracy inverts as we get older. 80-year old males give themselves a 32% chance of reaching 95, while the reality is that only 17% will make it that far. This leads to a reluctance to spend pension wealth that can lead to a lower quality of life in later years than is necessary.
So how much of a pension fund can you sensibly spend? While it depends to an extent on financial markets not hitting an extended rough patch lasting several years, spending 3% to 4% of a pension pot still generating average annual returns of 4% to 5% should mean it lasts as long as might be necessary. This would, however, mean the pension would be the same value at the time of death as when retirement started. While many want to be able to pass down an inheritance, it also doesn’t make sense to try to preserve the whole value of a pension pot throughout retirement at the expense of enjoying life.
Insurer Prudential’s research indicates that, if it returns 5% a year, £9000 withdrawn every year from a £150,000 pension will mean it last from retirement
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