This week's Portfolio Clinic candidate, Philip, aged 58, is certainly not contemplating being "Yours sincerely wasting away" in six years' time. He says: "If I live to age 90 (my relatives are long lived) my investment horizon is 32 years, so I don't see a good reason to adopt a conservative investment stance."
He's right to focus on life expectancy and how that affects his investments and asset allocation. Many financial advisers say that investors tend to underestimate how long they will live by about five years, running the risk of leaving themselves with lower income levels at the end of retirement.
But new research from Imperial College points to longer lifespans - and therefore investment horizons - than previously anticipated. The research has found that life expectancy at birth nationally will increase for men from 79.5 years in 2012 to 85.7 in 2030, and for women from 83.3 in 2012 to 87.6 in 2030. The researchers said that forecasts for 2030 are higher than those by the Office for National Statistics, by 2.4 years for men and 1.0 year for women.
LIFE EXPECTANCY AT BIRTH, 2030
Source: The Lancet, based on Imperial College research.
Note that these are averages, and so plenty of people born today will live much longer. And if you have already reached retirement age, your life expectancy is much greater than it was at birth.
Investors starting a retirement that could stretch to 30 years or more should note that longer lifespans will affect government policy and taxation. Professor Majid Exxati from the School of Public Health at Imperial College London, who led the study, says: "The bigger gains in life expectancy we predict will mean pensions will have larger payouts and health and social services will have to serve an older population than currently planned. We also forecast rising inequalities, with bigger increases in lifespan for people in affluent areas than those in disadvantaged areas. This means wealthy people will benefit more from health and social services than poor people, and therefore should be prepared to pay its costs through higher taxes."
In particular, you need to consider the possibility of paying out hefty sums for long-term care at the end of life. A mortgage-free home will be useful insurance, at the expense of the kids' inheritance.
Steve Lowe, director at retirement income specialist Just Retirement, says: "People will be expected to shoulder more responsibility for their own living and care costs in later life because the amount the state can afford to fund will carry on diminishing."
Longer life expectancy is arguably at odds with the new pension freedoms, which allow pension investors to take income and exhaust their pension pots as they wish.
Mr Lowe says: "The need for retirees taking pension money to look decades ahead, to average life expectancy and beyond, has never been greater, but pension 'freedom and choice' has heightened the risk that many will forego guaranteed income for life solutions in favour of immediate spending.
"Having access to pension money and control of pension money is not the same thing. If retirees aren't in control of investment and longevity risk, then they are not in control."
Controlling increased longevity risk, the risk of outliving your savings, brings us to the thorny issue of annuities. Annuity sales have been plummeting. But many independent financial advisers say they still have a place in a portfolio.
Should you hand over some of your capital and the investment control of your money in order to secure a basic guaranteed inflation-linked income? According to the Joseph Rowntree Foundation, single people need to earn £17,100 a year before tax to afford a minimum acceptable standard of living. Is this the amount to secure via an annuity?
First you need to look at how much secured income you already have in place. You may want to subtract the income from your state pension (bear in mind that this could be scaled back over the years by government policy). Also, you may have secured income from final-salary or defined-benefit pensions.
One benefit of securing a minimum basic level of income is that you can have the confidence to take on more investment risk and freedom with the remainder of your portfolio.
With longer life expectancies comes the risk that you might not be able to continue managing your investments indefinitely. There has already been a rise in the count of those suffering from dementia, and this is not the only illness that will affect your ability to manage your finances. At retirement, if not before, it is important to understand the framework that governs financial decision-making for those with restricted mental capacity.
You should think about setting up a Property & Affairs Lasting Power of Attorney, a legal document (required to be registered at the Office of the Public Guardian before it can be used) that gives one or more selected family members or trusted friends the power to make decisions about your financial and property matters, such as managing a bank account, operating an income drawdown strategy, or selling a house. At the same time you can also set up a Lasting Power of Attorney relating to your health and welfare.
Will my dad leave me a lump sum when I'm 64?
An interesting piece of research this week from HSBC revealed that traditional inheritance may be dying out. While more than half (58 per cent) of working-age people in the UK expect to leave an inheritance to their children, the reality is very different, with just a third (33 per cent) having actually received one.
Instead, HSBC has found that 'giving while living' is on the increase, often at the cost of the giver's retirement dreams. Half of retirees are providing regular financial support to their family and friends - a 'living inheritance'. In fact, our Portfolio Clinic investor, Philip, is doing just that in planning to give up to £100,000 each to his children to help them buy properties.
So if you are a decade or so from retirement and are expecting to receive a big lump sum inheritance to help or largely fund your retirement, then you may be being unrealistic. It may already have been given away.
