With Brits spending more and outliving their pensions, how can you ensure that you are sufficiently prepared for a longer life?
By Michelle McGrade, chief investment officer of TD Direct Investing
It’s an indisputable fact that we’re all living longer. Improved diets and better healthcare are contributing to the fact that people being born today have a much higher chance of living to a ripe old age than previous generations, and are far more active in their twilight years.
This increased longevity is problematic as we rely on our pensions to support us for longer. In some cases there’s a real, increasing and in many cases inevitable danger of people outliving their investments. There are, however, some steps that can be taken to mitigate against this.
The average life expectancy for England and Wales is on an upwards trajectory, which we assume will continue to rise. A person aged 20 in 2011, for example, is six times more likely to live to 100 than someone aged 80 in that year. For those aged 50 in 2011, men have an 11% chance of reaching 100 and women 16%. For those born in 1931, these figures are much lower, at 2.5% and 5.1% respectively (see appendix A below)
Additionally, not only are we living longer, but we are also spending more money. According to the British Retail Consortium, while retail sales in the UK have grown at their slowest pace since 2009, owing to consumers’ spending power being eroded by the fall of the sterling since the EU referendum vote and higher commodity and import prices, we are still spending more than ever before. In the third quarter of 2016, consumer spending reached an all-time high in the UK, up by more than 89% from the UK average, based on data from 1955 until 2016.
Even though this has major implications for the way we invest and manage our portfolios, it seems yet to have been fully considered by the investment industry. While the fact we’re living longer means we potentially have a longer time horizon for our investments to grow, it also means we will have to provide for ourselves for many more years than would have been expected in the past, impacting on both calculations and plans.
The State Pension age is rising
The State Pensions Act 2014 recognised this fact, and has introduced a mandatory regular review of the state pension age (SPA) at least once every five years. From 2020, the SPA for both men and women will be 66, an increase from the previous ages of 65 for men and 60 for women. This will subsequently rise to 67, and will be linked to life expectancy thereafter. If you’re a millennial, you’re probably going to be working well into your seventies.
The traditional model was to grow your assets until retirement, then go into a “decumulation phase” where the focus was on drawing an income. However, if you retire at 60 or 65, you may well need to provide for yourself and your spouse for another 20 to 40 years; therefore we will need to consider staying in the accumulation phase – even at 65.
Also, you may wish to continue working or indulge in a hobby, or splash out on a big ticket purchase or travel the world. This change in the way we live our lives later in life, combined with increased life expectancy, means it is essential we consider how to maintain our assets for much longer.
So how can you secure a comfortable retirement?
1) Act now. Start today by putting aside some money for later in life. It’s never too late to start. Even if you are close to retirement age, you should still consider yourself young and invest for the future. If you’re just starting out, less confident or short of time, consider passive options – such as our Quick Start Funds, where we have picked the Vanguard LifeStrategy range of funds which are a low cost, easy way to invest and grow your money over more than three years. Depending on your appetite for risk, these funds offer global exposure to a mix of assets in a cost efficient way, and is split into three levels of risk and return.
2) Focus on the things which are under your control and which will increase your wealth:
- Save as much as you can each month
- Invest in and diversify across a range of proven fund managers you can trust. It is advisable to invest in an area in which you are knowledgeable or interested; a specific sector, geography (UK, global or emerging) or, perhaps an investment approach such as sustainable solutions
- Make your portfolio as tax efficient as possible by making the most of your pension and ISA allowances. Invest for your children or grandchildren in a Junior Isa
3)Invest early and invest regularly. It’s all about growing your assets over time using the power of compounding. All you need to do is allocate a percentage of your income each month so that it gets invested without your fretting about it. If you invested £1000 into the UK stock market (as measured by the FTSE All-Share) and contributed £100 monthly, it could have grown to £52,985 after 20 years (the FTSE All-Share returned 16.8% in 2016 and 6.73% per annum (annualised) over 20 years – see appendix B below).
4) Maximise taxable allowances & utilise stocks & shares ISAs. As we are coming to the end of another tax year, it’s worth checking if you’ve used all your taxable allowances in your pension. Then make sure that you have invested in your stocks and shares ISA, either via the passive route or by focusing on an area of knowledge or interest
5) Relax and review. The market goes up and down and we need to be comfortable to ride these waves. There is no need to constantly review your portfolio, though it’s also good discipline to review it to ensure it still fits with your life goals, perhaps annually around February, ahead of the end of the financial year end and the spring budget announcement.
Embrace the fact that we’re living longer and plan for the future. The earlier in life you get started with investing the better – but, we must all remember that it’s never too early or late to begin. Even if you can only afford to put away a relatively small amount each month at first, the return can be hugely beneficial.