Long-term Planning
Planning for the age you might reach, not the one you expect
Life expectancy figures are averages, and roughly half of people exceed them. Planning to the average underfunds half of all retirements.
Everything here earned its place by changing an outcome. Nothing about longevity risk is included to round the number up.
What matters most
- Life expectancy at retirement is higher than life expectancy at birth.
- Planning to an average means a substantial chance of outliving the plan.
- Guaranteed lifetime income transfers longevity risk to an insurer.
Two different life expectancy figures
Life expectancy at birth includes deaths at every age, which pulls the figure down relative to someone who has already reached sixty-five. Life expectancy conditional on having reached retirement age is therefore notably higher, and it is the relevant number for planning. Using the wrong one systematically understates how long a retirement needs to be funded.
National statistics offices publish both, along with cohort projections that allow for expected future improvements.
An average is not a target
By construction, roughly half of people live longer than the median, and a meaningful proportion live very much longer. A plan funded to the average is therefore a plan with a substantial chance of running out while the person is still alive. Planning instead to a high percentile — an age a much smaller proportion will exceed — costs more and fails less often.
The right margin depends on how bad running out would be, which depends on what guaranteed income remains.
Longevity varies by more than age
Health, occupation, income, education and location all correlate with life expectancy, sometimes by many years within the same country. National averages therefore describe a population, not you, and family history and current health are relevant inputs. This is one reason personalised advice differs so much from general guidance on retirement income.
It also means couples must plan for the survivor, whose horizon is longer than either individual's.
Guaranteed income transfers the risk
An annuity or a defined benefit pension pays for life, which moves the risk of living a long time to an institution designed to pool it. That protection is priced, and the price reflects interest rates, life expectancy assumptions and the insurer's margin. Combining a guaranteed floor covering essential spending with flexible drawing for the rest is a common structure, though its suitability is entirely individual.
The arithmetic is straightforward: these decisions are usually irreversible, which is precisely why they warrant regulated advice.
Care costs are the tail risk
The later years of a long life can involve substantial care costs, and how these are funded differs enormously between countries. Some systems provide extensive state support subject to means testing; others leave most of the cost with the individual.
The distribution is highly skewed: many people incur little, and some incur a great deal over several years. Understanding what your own system covers, and at what thresholds, is a prerequisite for any long-run plan.
Building flexibility instead of certainty
Where guaranteed income is not affordable or available, flexibility is the alternative defence. Rules that reduce withdrawals after poor years, retaining a housing asset that could be released, and keeping discretionary spending separable all extend how long a plan survives.
Reviewing the plan annually against actual portfolio value catches problems while adjustment is still possible. This is general information about the shape of the risk, not advice about how to fund your own retirement.
Everything above, in order of what to do first
- Two different life expectancy figures. Life expectancy at birth includes deaths at every age, which pulls the figure down relative to someone who has already reached sixty-five.
- An average is not a target. By construction, roughly half of people live longer than the median, and a meaningful proportion live very much longer.
- Longevity varies by more than age. Health, occupation, income, education and location all correlate with life expectancy, sometimes by many years within the same country.
- Guaranteed income transfers the risk. An annuity or a defined benefit pension pays for life, which moves the risk of living a long time to an institution designed to pool it.
- Care costs are the tail risk. The later years of a long life can involve substantial care costs, and how these are funded differs enormously between countries.
- Building flexibility instead of certainty. Where guaranteed income is not affordable or available, flexibility is the alternative defence.
The takeaway
Plan to an age you probably will not reach. The alternative is a plan that fails exactly when you cannot fix it.
Write the number down before you decide. It usually decides for you.
Questions readers ask
What age should I plan to?
Longer than average life expectancy at your retirement age — many planners use a high percentile rather than the median. The right margin depends on how much guaranteed income you have.
Do annuities represent poor value?
They convert capital into guaranteed income for life, which is a different product from an investment. Whether the price is worth it depends on your health, other income and how badly running out would affect you.
