For How Many Years Will You Need an Income?
Sometimes you read something and you say that can’t be true can it? Maybe something like chocolate is actually good for you. Then you read the science and you realise it’s true.
It is exceptionally rare in the financial world to find a fact which is both reliable and, more importantly, informative and revealing.
Very few people properly understand life expectancy; this includes most so-called experts.
The vast majority of people think of life expectancy as their most likely age of death. This is wrong, it is not. Life expectancy is an average age of death of a group of people.
This mathematical quirk is really very important, because, if you can recall from school days, it is all about the difference between averages, means and modes.
What is the most important factor in this case? Not the average or the mean, but the mode.
The mode will tell you what age you are most likely to die. This is quite typically several years, in some cases as many as seven years, higher than your life expectancy.
This is not some form of vague theory, this is straight from the life tables and related papers that are made available from the Office of National Statistics (ONS).
The ONS produce amazingly accurate and informative figures and publish (and update) them regularly. So we can see the pattern and the information in precise terms.
Your life expectancy comes from the bundling together of a huge group of people across the population which is then averaged out. But around this average the ‘skew’, as it is known, is quite dramatic in the way it produces a very different average from the mode.
The mode is what is important, because that tells you that you are in fact more likely to live longer than your life expectancy. If you know that, then you will also know it is more likely you will need to provide income for even longer than you may have, at first, thought.
In our view this puts a complete end to any idea that you should be provided with your life expectancy at your point of retirement – which was an idea being considered by the government. Such an initiative would potentially create a false position and possibly lead to poor financial decisions being made.
There is evidence from both the US and Australia, which have pension systems similar to the one now in place in the UK, that more people run out of money in retirement than is comfortable for society to stomach. Bear in mind that the baby boomers are still in the early stage of retirement, therefore this unhappy trend could be one to accelerate as the number of people over 80, 90 and 100 all radically escalate.
Also, bear in mind the UK has only recently shifted to this new-style pension framework. The old framework, which meant a large portion of retirees had gilt-edged company schemes or those providing for themselves were able to secure high paying annuities, has all but disappeared.
So the threat economically and socially is real and large; misunderstanding the length of time that income must be provided for is only going to make the position worse.
Individually what can you do? Understand the true possibility of how long you might live and start planning accordingly. To help with this we have written a guide on the subject that you can download here.
This is a guide which explains more, but crucially also presents the financial planning solutions which will enable you to tackle this position.
We are here to help; if you would like to explore a long-term income and expenditure plan with us, we can develop a cash flow plan from any starting age and show you the effects of a long income requirement and what steps you need to take to meet this. This works for anyone of any age today.