How to Avoid Outliving Your Retirement Savings

FUTURE PROOF: Morningstar's head of retirement research David Blanchett outlines the importance of understanding how far your pension pot will have to stretch in retirement

Morningstar 22 December, 2014 | 4:53PM

One financial term I think those nearing retirement should better understand is longevity risk. Longevity risk deals with the risk of outliving your savings. People are living longer, and this means the cost of retirement keeps increasing.

We can’t know how long we’ll live. But what we can do is become better educated on life expectancies. Life expectancy is the average number of years an individual is expected to survive at a given age. For example, the life expectancy today for a newborn is approximately 82 years.* The life expectancy today for a 65-year-old is approximately 20 years (i.e., living until age 85). The Department of Work and Pensions estimates 17% of Britons alive today will live to be 100.**

So What is The Right Retirement Planning Period?

First, the expected length of your retirement should be longer than your life expectancy, since you want a cushion should you live longer than average. For a 65-year-old today in average health, I think the minimum period should be 25 years. For a couple, both age 65 and in average health, I think the minimum period should be 30 years.

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