Pensions and future planning: The hidden financial risk of living into your 90s

Ralph Benson

THE STORY GOES that a young man remarked to Voltaire that life is hard. “Compared to what?” the French wit is said to have replied.

He probably wasn’t thinking of his pension, but the young man had a point. Long lives pose new difficulties for providing income in retirement. There are three main challenges. Most obviously, the longer one spends in retirement, the thinner your money must be spread.

Secondly, retirement tends to be final. Few of us fancy going back into the workforce in our 70s or 80s, or if we do, it’s for job satisfaction rather than for the money.

And lastly, the practical challenges of managing investments, income and costs in later life are only now being worked out in Irish society.

It’s longer than you think

Most people underestimate how long they will spend in retirement. That could be true at any age, because day-to-day life isn’t lived in these time spans. If you are aged 40, you’re investing money you’ll be spending in maybe 2075. Who knows what the world will look like then.

Similarly, if you’re retiring today at 65, life expectancy is 83 if you’re male, and 86 if you’re female (based on 2016 data). And financially, you need to plan for the outlier: there are already more than a thousand centenarians in Ireland, a number that will only rise.

Source: Alamy Stock Photo

There are three main stages of demand on your money in retirement. In the early years, leaving work is expensive. You’ve got plans, and plans cost money: travel, new experiences, not to mention the fact that workplace benefits disappear. Hell, the children might still be on the books in the early years, or the mortgage may have a bit to go. With luck, a retirement lump sum helps pay for many of these plans. 

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The second phase is less demanding financially. The State pension turns on, the contents of the bucket list have emptied a little, and your financial needs are more stable.

Invest in your future self 

Lastly, no one wants to run out of money altogether in retirement. So the third phase is about holding funds back, potentially for use in later life care. It’s all very well planning to die with a Euro in the bank; in practice, anyone prudent is keeping a substantial sum in reserve for the third phase of retirement.

The first step to dealing with these challenges is to engage with them. It’s hard to imagine oneself 10 or 20 years from now. Have you really visualised what your retirement will look like? How will you spend your days? Have you talked to your partner about it – and do they share your view?

A lot of people dream of retiring early, but what will that really mean? For many people, this is more about a change of career, or a change of pace, than a total escape from the workforce. If you get out at, say, age 55, a second career is open to you, and it’ll likely be one you’re conducting on your own terms. That makes it a lot more sustainable into your 70s. Voltaire, for example, moved from France to Prussia at the age of 56, and got a decent pay rise into the bargain.

If you’re determined to retire early for good, it’ll take some special planning. It’s obvious when spelt out, but early retirement introduces three effects which diminish your wealth: you’ve less time to put money away, the money has less time to compound and grow in investment markets, and you’re drawing it down over a longer period in retirement. If you want to retire early, plan early.

So, what can you do?

For the rest of us, who want to retire around 65 and are rightly worried about longevity risk, there are several sensible actions we can take.

If you’re mid-career, identify the period when you are seriously going to get after your pension – ideally now. For most people, this is the key earning years of 45-55, when salary has, with luck, gone up, and costs like childcare and mortgages have reduced.

Make sure you have something to show for these years financially. That means aggressively funding your pension – ideally to the maximum tax-deductible threshold of 25% of your income in your 40s, rising to 30% in your early 50s.

You’ll save income tax on the money you pay in, it’ll grow tax-free in the pension, and you’re putting the money to work at a time when you can take on significant investment risk in return for the prospect of capital growth.

While you do this, get a second opinion on your pension, because the changes that you implement now have time to play out and benefit you over the long term. Pensions Awareness Week is offering reviews at no cost.

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If this sounds like you, the deadline for topping up your pension and claiming back income tax you paid last year is 18 November, so it’s worth taking action now.

As you approach retirement, there is still time to add to your pension. But you are more concerned with protecting what you have, and in particular, protecting the value of any tax-free lump sum. That means identifying a timeline or sequence to draw down your pensions, and investing accordingly.

People in Ireland tend to have more than 10 jobs in the course of their career. It’s likely you’ve amassed a number of pension pots. Not all need to be taken at once. Perhaps one pension can remain untapped until age 75, for example. If so, it should have a quite different risk-reward profile than the pot that is going to get you out of the workforce early at age 62.

That said, if you’re approaching retirement, or just after it, it’s important to avoid major banana skins in investment markets. A serious drop in your wealth early in retirement can have a long-term impact.

Many retirees identify separate pots of money for the near, mid and long term, and use investment strategies appropriate to each timescale.

You’ll also need to consider how you will manage your money in practical terms in retirement. Have you identified who will make money decisions if something happens to you?

Will you be comfortable making investment decisions into your 80s and 90s? Perhaps an annuity will be an appropriate choice at that point, even if you’re happy to manage your money alongside an adviser now.

As for Voltaire? He worked until his death at 83, one of the richest men in France.

Ralph Benson is head of financial advice at online investments and pensions adviser Moneycube.ie Moneycube organises the annual Pensions Awareness Week (PAW), which is taking place this week from 21-25 September.