May news article

Longevity and Financial Planning

The Institute for Fiscal Studies (IFS) have recently published findings showing the extent to which various age groups are misjudging how long they are likely to live.

It seems that, on average, those aged in their 50s and 60s underestimated their chances of living to age 75 by about 20% and to age 85 by around 10%.

According to the analysis, men born in the 1940s who were interviewed at age 65 considered that they had a 65% of making it to age 75, far lower than the official estimate of 83%. Women also believed they had a 65% chance of making it so age 75, but the official estimate was even higher – 89%!

The “underestimation” of longevity can have a serious impact on financial planning strategies.

Self-evidently, if you plan on the basis you will live until X but you actually live until Z you could be “caught short” (financially speaking) and estimating T but surviving to Z makes it even worse – we could go on – but I’m sure you get the picture. Cashflow modelling tools are designed to expose and make clear this false optimism – this is something we work on with clients at Michael Ambrose Limited.

Some groups were more pessimistic than others about their survival chances, including widows and widowers at age 60. It implied that widows and widowers could be more prone to prematurely exhausting their retirement income.

Conversely, the analysis found older people in their 70s and 80s were, on average, overly optimistic about the likelihood of living to age 90 and beyond. This could mean they spend too little of their income in the belief it will have to stretch out much longer.

Planning is the most important factor – understanding what you have is half the battle. Don’t delay; discuss your options with us today.