Our recent 'Cost of retirement' report estimates that the cost of retirement for someone who retires at 65 and lives to 100 could be as much as £1.55 million for someone at the top end of the income scale. This means that for many of us, pensions and annuities alone will not be enough to adequately finance the additional years in retirement created by increasing longevity.
For this reason, more and more people will face the prospect of having to liquidate precious assets such as property, leaving less behind for children and grandchildren to inherit. Or worse, they risk not having enough money to live out their final years in comfort.
It's hard to predict how much money you may need in planning for retirement, especially if there is a strong possibility that it may have to last for decades. Below are some things we think you should consider:
The effect of inflation
You may be familiar with recent headlines stating that fuel, food and energy prices are on the up, driving up the overall inflation figure. But have you considered what the effect of inflation might be on your retirement income over time? Low levels of inflation in recent years may have lulled us into a false sense of security. Inflation on typical goods and services currently stands at 3.8% per annum.
However, inflation for pensioners currently stands at around 7% due to higher increases in the sort of goods that pensioners rely on - such as gas, electricity, fuel and household expenditure.
This means that you'll need to spend more money just to maintain your living standards as the years go by. This could put a strain on your savings and investments as you draw on them to supplement your income in larger amounts over time.
The graph below shows how inflation at just 3% will halve the value of a fixed retirement income such as a level annuity in 23 years - or by age 88 if you retire at 65.
See the effect of inflation on your desired retirement income with our inflation calculator
Unexpected expenses
Inflation isn't the only thing that threatens to eat into your retirement savings. You're very likely to encounter unexpected expenses along the way which need to be factored in, whether it's a roof replacement, private health and dental care or financial assistance for children and grandchildren.
Care expenses
According to a recent report by Saga, the cost of long-term care is predicted to double in the next 20 years. Nearly one in five people aged 85 or over are already in long-term care, but with people living longer growing numbers of families will be hit by the costs of paying for a care home place - especially as those with more than £21,500 of capital have to pay most of the fees themselves. Although not always a pleasant prospect, this may be a significant additional expense in later years and one that will need to be factored in.
Protecting what's yours
Inflation and unexpected expenses may eat into your retirement savings more than you expect.
While you may not run out of money in late retirement, you may well need to make cut backs or resort to using other assets to maintain your standard of living. These assets may well have been the ones you wanted to pass onto your children and grandchildren
Planning ahead is the key
With the right planning in place now, you could receive a supplementary income for later retirement that could protect your capital from drying up - allowing you to maintain both a good living standard and hold onto what's yours. This is why we have launched the Longevity Income Plan.