With significant increases in life expectancy, retirees know a long retirement is now likely, but are uncertain how they will make their savings last, and enjoy a healthy, financially stress-free, retirement. We look at these two trends and how they give advisers an even bigger role to play in their clients’ retirement journey.
The implications of longevity
Longevity needs to be seen as a certainty when planning for retirement. From a global average life expectancy of 48 years in 1950 to 73 years in 2019, retirement can now take up three or more decades of your life. “More people are expected to live to a greater age compared to 20 years ago,” says the World Economic Forum’s 2023 longevity and retirement report (WEF report).
Longevity has given rise to the two most important retirement trends.
Trend #1: A widening retirement savings gap
This is the difference between what is needed and what is saved for retirement. Longevity has meant that the difference is growing. The BlackRock 2023 Read on Retirement survey found that only 21% of workers were confident they would save enough for retirement.
Retirement reforms, across the globe, aim to deal with the widening retirement savings gap. However, whether it is raising the retirement age or enforcing preservation of retirement savings, retirement reforms are happening too slowly for many retirees and workers, who will have to find their own way to deal with the longevity challenges.
The WEF report lists four ways to deal with the challenge of not saving enough:
- Save more
- Work for longer – delaying retirement
- Accept that retirement income will be less than expected and wanted
- Adopt an aggressive high-risk investment strategy to earn higher returns
Another option retirees are considering is part time work or starting new careers after retiring. This may not be what was intended, but it eases the financial strain and gives retirees a purpose and the social connections that are so important.
If retirees are in a country with a strong exchange rate, they can also consider geo-arbitrage, where they spend all or some of their retirement in a country where the exchange rate effectively gives them more money. Think of this as a UK pensioner moving to Cape Town and benefiting from the rand/pound exchange rate. Plus, the weather is better.
Trend #2: Purpose and quality of life matter in retirement
While financial wellness is the hot retirement topic, purpose and quality of life are rising concerns among retirees, according to the WEF (World Economic Forum) report. Retirees want to enjoy their extra decades, live healthy lives and have a purpose in life. Many find purpose through work, and/or volunteering.
Health, healthcare, the cost of healthcare and the fear of losing physical and mental abilities rank alongside financial independence as top concerns for today’s retirees. As a result, they are prioritising healthy habits, saving for and spending money on staying healthy and healthcare.
The role of the adviser
Retirement planning is about more than money, focusing not just on saving enough but also on how retirees will live their later years. There are many ways advisers can help savers and retirees achieve financial independence in retirement.
Advisers can offer savers and retirees the financial advice and education they want
A key finding in the WEF report is that only 10% of people under 40 and 17% of those over 40 say they don’t want financial advice. While those surveyed indicated they may seek advice from less traditional mediums, such as TikTok, advice from family and friends, financial advisers and reading, all rate higher than advice from social media, across all age groups! Saving goals may differ, but the need for advice is high in a world where longevity has meant more is needed in the later years of life.
Local and international studies also show a low level of understanding of retirement planning, and investments, and a desire to understand and know more.
Advisers can ensure savers and retirees have tailored retirement plans
“One size fits all retirement plans are a thing of the past,” says the Society of Actuaries Institute in the April 2023 Megatrends in retirement report. Retirement planning needs to be more tailored as retirement becomes a journey of many years. In addition, the rise of the gig-working economy means younger investors need to save a little differently to generations before them. Only an adviser can assess a client’s needs, consider their goals and financial situation, and help them stick to a realistic retirement plan that won't lead to a wide gap between savings and income requirements.
Advisers can ensure retirement products are appropriate
Advisers are uniquely placed to advise workers and retirees on the different products available and when they are appropriate, such as saving for retirement and managing savings in retirement. One example is annuities. Guaranteed annuities, which offer guaranteed income for life, have only been popular if the income guaranteed meets expectations. Often, it doesn’t, so the preference has been for living annuities where a drawdown level, as discussed and agreed upon with your financial adviser and aligned to your financial needs, can be selected to provide the desired income. Unlike guaranteed annuities however, living annuities only last as long as the capital lasts, which may not be as long as retirement lasts. New hybrid options, offering both guarantees and flexibility are now available, such as the Wealthport Living Annuity, and are more suited to current retirement needs.
Change means opportunity!
Retirement has turned into a three-decade affair, which is for all but the superrich a daunting prospect. The implications of longevity are extensive, but the opportunity for advisers to help those in retirement and planning for retirement are equally extensive.