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Underestimating life expectancy in retirement

One of the biggest challenges associated with retirement planning underestimating life expectancy.

If you are underestimating life expectancy, you risk failing to save enough for retirement or running out of money in later life.

Overestimate your life expectancy, and there’s a risk of saving too much or spending too little in your golden years, failing to live the life you want.

According to some new research, we have a habit of underestimating our life expectancy. As a result, we could face an £80,000 shortfall in our retirement savings.

Here’s how those numbers stack up.

The research from insurer Scottish Widows found that one in five people are using the age to which their grandparents lived as a yardstick for their life expectancy.

Referring to the lifespan of a previous generation is an irrational methodology when longevity improvements mean we can expect to live, on average, 11 years longer today.

The typical life expectancy of UK adults saving for retirement is 87 years old.

However, the average adult is expecting to shuffle off this mortal coil at 82, after retiring at 65. Talk about underestimating life expectancy!

These expectations mean a typical retirement is 30% longer than expected, at 22 rather than 17 years long. Those five extra years of retirement require an additional £80,000 in savings.

Despite this likely shortfall, the research also found that one in 10 over-50s don’t know how they will fund their retirement income, and nearly a third say they fear running out of money in retirement.

And the out-of-date assumptions about life expectancy could put retirement plans at risk. Only 9% of over-50s said they were planning to buy a retirement income product that provides a secure income for life, such as an annuity.

Failure to secure an income in retirement could be the result of a lack of knowledge. The research found that 13% of over-50s didn’t know which retirement income products guaranteed an income for life.

Emma Watkins, Annuities Director at Scottish Widows, said:

Life expectancy has grown substantially in the last 60 years and now one in 10 people will live to be 100. As the concept of the three-stage life is becoming out of date, people facing into retirement are also facing a trade-off between saving more, working longer or having a clearer plan. Pension Freedoms opened the door to new opportunities and flexibility for savers, but advice on the best way to put in place a stable, predictable income for life would give some comfort to those facing a retirement that could last more than 20 years.

As part of the Financial Planning process, we make a series of reasonable assumptions about the future. These assumptions include life expectancy, with our lifetime cash flow forecasts projecting through to age 100.

We review these assumptions throughout the Financial Plan, as they change over time. By keeping assumptions under regular review, we keep your Financial Plan on track, even when external factors change.

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