Since my last blog on IFAonline, we at Life Trust have been working on producing a report that puts a figure on the cost of retirement in conjunction with the Centre for Economic and Business Research.
Many may have seen some of the headline findings on the news section of this site, with the report finding that the average household needed £413,000 to fund a retirement lasting from 65 to the average life expectancy.
The research put a nice round figure on the cost of retirement for various groups and IFAs will appreciate that these figures might look daunting to the average member of the public, particularly when the impact of increasing longevity is factored in.
Those in the top 20% for earnings could expect to spend £1.55m on their retirement should they live to 100, according to our report. The aspect of the report that most grabbed my interest, however, was the analysis of people’s spending patterns; specifically how inflation on essentials acts as a kill joy to recreational spending for pensioners as they move through retirement.
The report found that spending on transport, recreation and culture, hotels and restaurants, and alcohol and tobacco accounts for 44% at age 65. This then falls to 26% at age 85 and 18% at age 95. Declining health surely has a big effect on this reduction of travel and recreation, but less so than one might think.
Professor Sarah Harper, Director of the Oxford Institute of Ageing, has been quoted on several occasions as saying that soon “90 will be the new 70” and the effects of increasing longevity and medical advances do indeed mean that octogenarians are remaining increasingly active and able. The fact of the matter is, however, that many people don’t have the disposable income to accompany their physical well-being.
The report revealed that, as we get older, more and more of our budget is eaten up by the basic costs of living. The amount spent on fuel, housing and power increases nearly four fold during retirement going from £34 per week at age 65 to £116 at 92. This is as a result of disproportionately high inflation on these areas.
Those retiring today, born and raised in the long shadow of the second world war, amidst rationing and economic deprivation, may well know a thing or two about sacrifice. It is far from heartening, however, to see that, as they head into later retirement, they again will have to start cutting back on the things in life they enjoy and simply make do with the basics. This is doubly sad given that social engagement and staying active are proven by research to be key ingredients in helping extend people’s life span.
The very heart of retirement planning is ensuring that people in the decumulation phase are amply provided for the whole duration, but the increase in products such as equity release in recent years reveals that it is not rare for people to run short of income. There is no doubt many more are cutting back in order to run a tighter budget. It is vitally important that we in financial services offer today’s retirees products, services and advice that can save them from foregoing indulgences in their later retirement, in the same way they did at the outset of their lives.
Mike Tyler is head of strategy at Life Trust
The views expressed in this blog are those of the individual.IFAonline
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