Industry Voice: Scottish Widows Pension Expert Robert Cochran caught up with Andrew Scott to discuss retirement planning in an age of longevity. Andrew Scott is a Professor of Economics at London Business School and co-author of the book 'The 100 Year Life - Living and Working in an Age of Longevity'.
According to the Office for National Statistics, a child born today in the UK has a 1 in 3 chance of living to 100. That's a staggering increase from someone born in 1951, when life expectancy was 72 for women and 67 for men. As it stands, each generation is living an average of around 10 years longer than the previous one.
The fact that we are generally living, and remaining healthy, for longer than ever before is fantastic news. However, this also has some fairly major, and often overlooked, consequences for our way of life. We can't simply follow in our parents' footsteps as the social norms that worked for them are unlikely to work over longer lives. We will all have to start doing things differently. This is particularly apparent in retirement planning.
Preparing for a longer retirement
If you are living for longer then you likely imagine being retired for longer, too. However, this longer retirement must be financed somehow - you are either going to have to retire later or save more.
To see the magnitude of this effect, consider two of the personas outlined in "The 100 Year Life - Living and Working in an Age of Longevity". One of the characters, Jack, was born in 1945 and lived for 70 years, retiring at 62. If he wanted to achieve a pension worth 50% of his final salary, according to our calculations, he only needed to save around 4% of his income every year into a personal pension plan to fund his 8-year retirement.
Now, compare that with Jane, our millennial. She was born in 1999, with a life expectancy of 100. If she hopes to retire at 65, she will need to save 25% of her income each year into her pension plan - for the duration of her entire working life - to fund a 35-year retirement. That seems patently unrealistic. However, if Jane is prepared to save around 10% a year, then she can retire in her late 70s.
For Jane, this raises the prospect of a 60-year career. That's quite a thought. It's hard to imagine what sort of career could last that long. Will technology take away her job in that time? What skills could she learn at 20 that would last her for that long? Will she want to work at the same job for 60 years, even if she can?
Restructuring life for longevity
Thinking of Jane's 60-year career starts to open up what is really happening with living longer. We have more time and in response we need to restructure our lives. Imagine what would happen if the day was extended from 24 to 32 hours. We wouldn't just add eight extra hours of sleep. Nor would we simply stretch out our day to create longer gaps between breakfast, lunch and dinner. We would create new time structures, new meals, and do things differently.
This is what is happening in response to longer lives. The three-stage life of education, work, and retirement is evolving into something new. We are seeing the rise of multi-stage lives with people having several different career stages. Some of those career stages look familiar and involve full-time work. Others involve flexible or part-time working, charity work, or entrepreneurship.
The financial consequences of living longer
In a multi-stage life, individual's needs and income will vary much more over their life. When work is good and income is high they may well be accumulating assets in a traditional manner. But at other times as they take a career break, retrain, work as a freelancer, or spend time finding a new job, they will be running down assets instead of building them up. Even in retirement people may alternate between periods of rest and then going back and earning again. We've already started to see this, with the increase of "unretirement" in the UK.
Robert Cochran concurs, "For a longer life, financial plans need to be more flexible. This flexibility in managing personal finances matters both in the lead up to and during retirement, and is only compounded by current pension freedom policies. "
Guiding your clients through these changes
For financial advisers the implications are myriad. The first is that the traditional models based on set forms of behaviour and short life spans no longer hold. The second is that age is becoming less and less reliable as an indicator of financial needs. Thirdly, the advent of pension freedoms means that people have more flexibility than ever to take their own unique journey to and through later life. This only increases the importance of flexibility and variability in the retirement solutions put in place to meet those needs.
Robert Cochran believes advisers are well placed to deliver the ongoing support needed and create value for their clients. "A longer, more varied life will mean clients need help understanding all of their options, the consequences of their choices, and how best to manage the financial risks. Ultimately, understanding your clients' life plans and motivations will be the key to successful financial planning."
For more insight, case studies and expert guidance on retirement planning, visit scottishwidows.co.uk/takeacloserlook.