The traditional wisdom around retirement planning is fast being sidelined as many individuals start to realise they are likely to have several years left at the end of their money, despite having thought they had made adequate provision for their retirement.
Jason Bernic, Financial Planning Coach at Old Mutual Wealth, says clients are increasingly concerned – and rightfully so – that their money may run out during retirement, and that they will become financially vulnerable in the years when they can least afford it.
“Age management has become a major factor in retirement planning, and the introduction of a ‘buffer’ is a crucial requirement,” says Bernic.
According to Professor Sarah Harper, Director of the Oxford Institute of Population Ageing, scientific developments are pushing back our ability to live longer and longer, and potentially to 120 or 150.
“While life expectancy has already increased significantly, it is set to do so even further in coming decades, which is why we strongly recommend advisers to make provisions which will enable clients to live comfortably up to the age of 100 – for now,” Bernic says.
Bernic says that financial modelling systems allow planners to adjust a client’s retirement age, which will change the parameters of the planning leading up to retirement.
“In many cases, just one year of additional work will go a long way. Five will result in a significant positive difference to an individual’s financial forecast,” he says.
Bernic adds that the traditional notion of retirement is also coming under review.
“We work with many retiring and retired individuals, and rarely does retirement still involve the complete cessation of work in favour of sitting at home or going fishing for the next three decades,” he says.
“In the past, hitting forty meant you were halfway through your working life. Now the reality is very different. The retirement age is increasing in many countries, for example it is currently 66 in the USA, with plans to up it to 67. In the UK, 65 is the retirement age but there will be a staggered increase to 70 by the 2050s. France’s retirement age is set to rise to 62 from 60 over the next eight years.”
“One’s age of passing is an unknown factor which needs to be compensated for. Money managers used to use Life Phases to plan for clients’ retirement monies, but this no longer makes sense. The idea that there is a phase of accumulation, building, consolidating then defending no longer works.
“It is also no longer advisable to start aggressively and then taper the risk as you near retirement, while managing a very conservative portfolio into retirement while the bull market leaves you in its dust.
“The fact is that money makes money over time, and clients should plan to achieve their goals, which include the lifestyle that they want to lead. If success means remaining in equities over time, then that is the approach that should be followed, albeit with the appropriate understanding that markets will fluctuate.”
Bernic says in the past, the vast majority of retirees elected to withdraw retirement savings as a lump sum when retiring, using that money to repay debt or splurge on holidays and luxuries. However with increased life expectancy, following this route is very likely to lead to a situation where the individual outlives their capital.
It should also be kept in mind that with advances in medicine, retirees can expect better health – albeit with significant additional medical cost – and therefore the demand for a lifestyle that could become very expensive in ensuing decades.
And finally, astronomical medical bills may once again arrive at just the time when there is nothing left to pay them with.
“It is therefore a non-negotiable for people to get professional assistance when planning for their retirement, from experts who have the right tools to ensure a regular income even if an individual hits a century, and then stick to the plan,” says Bernic.
“Flying by the seat of your pants with only the direction of traditional retirement planning wisdom could mean a very hard few years at the end of one’s life, after all the capital is gone.”
WHEN PLANNING FOR RETIREMENT, KEEP THE FOLLOWING IN MIND:
• Expect to need more money for longer.
• Bank on expenses going up initially, and then tapering off as you get older.
• Set realistic goals and ensure you have made adequate provision for them.
• Hope that everything will be fine… Plan for it to be.
• Retire to the coast because just because it sounds like a good idea.
• Fall for any make-money-quick schemes that sound too good to be true.