Planning would be simple if you knew when you were going to die. You would simply divide the money you have now by the time you have left and then spend it. It might even mean that you wouldn’t need an adviser.
The two issues that lead people to be too cautious with their retirement expenditure are the unknowns of life expectancy and later life care costs. When we plan our clients’ future cashflows we assume two things to solve for this. The first is that they will live beyond average life expectancy and the second is that they probably wont need care (and if they do they will use the house to pay for it).
You can check your own average life expectancy on the Office of National Statistics calculator. A 50 year old man has an average life expectancy of 84 but more importantly has a 1 in 4 chance of making it to 93. Our cashflow software always runs to the 1 in 10 chance age, which for this individual is actually 98. In this way the cashflow is tested to the outer boundaries of what the client’s life expectancy is likely to be.
Although your average might be 84, there are several things that raise this average for our clients. Health, wealth and postcode all have push your average life expectancy up from the UK average that the ONS is reporting here. In the case of our clients, the second two of these are always positive effects.
We encourage our clients to invest as though they will live a long time but to live day to day as though they won’t.
People often hold back on early retirement spending because they are worried about needing capital for care costs in later retirement. The government calculates that 1 in 4 65 year olds needs help with at least 1 activity of daily living. This doesn’t mean that they need paid for care but it is an indication that their health may be moving in that direction. By the age of 85, this has risen to 1 in 2. So the chances of needing paid for care are still low but increase the longer you live. As male life expectancy if shorter than female life expectancy (mortality) but their health tends to be better (morbidity) they have less chance of needing care. Anecdotally women live longer in residential care and therefore spend more.
According to the Kings Fund, the average cost of local authority funded residential care is £44,000 per annum, with estimates that the privately funded equivalent is 40% more expensive and so is circa £61,000 per annum. The Dilnot Commission estimated that half of 65 year olds will spend up to £20,000 on care costs in their lifetime. The government estimates that 1 in 7 of these people will pay more than £100,000.
So is it fair that we ignore care costs in our cashflow assessments?
Well firstly, if a client wants to see the impact we can model it as an additional scenario. However, planning your retirement spending based on an assumption that you will need expensive care provision runs a high risk of under-spending in early retirement and leaving surplus capital for HMRC to tax to inheritance tax. In addition the main family home can be sold or borrowed against in most cases to fund care, leaving your liquid wealth to be spent or gifted freely.
This is all we can do until the government tackles the chronic issues of social care in the UK. The Dilnot Commission is nearly a decade and a half old now and their proposals are still sat on a shelf gathering dust.