People walking through a clock symbolising the passing of time. Life expectancy, financial issue, money

Written by 8:52 am Investing, Money & Lifestyle

Why life expectancy is a financial issue

About 6 minutes to read

When you stop and think about it, life expectancy is one of the biggest money conundrums any of us will ever face. 

It impacts how much we think we need to save over the course of our lifetime – how long we should keep working; how much we should ideally contribute to a pension and to our investments; how fast we want to pay off our mortgage; how often we revisit our wills. 

As soon as you start asking ‘how long do you think you’ll live’ or ‘how will I retire’, questions around money just blossom everywhere. It’s kind of intimidating.

Because you don’t want to run out of money when you’re eighty just because you didn’t quite expect to live that long. Nor do you want to be ready for retirement but not be able to because you’ve not saved enough over the course of your lifetime. 

There are a lot of calculations that come into play when you start thinking about the length of your life and some of the ways that you might plan for longevity include things like working longer (look, it’s an option), adapting investment strategies over the course of your lifetime (ie. taking more risk when you’re younger and less as you grow older), or planning for health complications or supportive care. 

And yes, it might feel morbid given many of us are twenty and thirty-somethings. We’re still young.

But planning for the uncertainties of life and how long or short it could be, is something that we need to consider when making decisions about our money. After all, it could impact our short-term and long-term goals, and open up questions that perhaps we hadn’t considered yet. Questions like: 

  • When do I really want to retire? 
  • Do I want to take a career break whilst I’m young? 
  • What happens if I take time out for family? 
  • How much should I be saving for my age? 
  • What do I want to write in my Will? 

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The fact is that we’re living longer – and we can’t ignore the implications. 

As Sarah O’Connor, a Financial Times journalist, points out, “In the UK in 1917, King George V sent 24 congratulatory telegrams to citizens who had reached their 100th birthday. By the mid-1980s there were about 3,000 centenarians. In 2019, there were more than 13,000.”

It’s a sign of how much life expectancy has gone up – how our standard of living and health has improved. Pension age is roughly linked to this. In the UK, it’s assumed that you’ll spend around a third of your life in retirement – but when that time starts to extend, you have to think about just how much you need to save and invest in order to maintain a longer time frame out of work. 

Some have suggested longer life spans means everyone needs to work longer and the pension age needs to increase but there are quibbles around this for various reasons – not least that social inequality does play a role in life expectancy too.

As O’Connor also acknowledges, wealth correlates with how long you’re likely to live. Deprived parts of the country and poorer areas of affluent cities like London have seen life expectancy decreasing since the 2010s. 

“There is a good argument for the UK’s simple approach to the state pension. It makes sure the system doesn’t grow too unaffordable, which is important for the younger generations who have to pay for it with their taxes.

It also avoids the messy complexity of varying the state pension age by postcode (what if people move around?) or job history,” O’Connor writes on the debate about whether or not the retirement age should go up with average life expectancy. “Decisions about retirement ages are so difficult because they sit at the confluence of two trends: the fact we are growing older, and the fact we are growing more unequal. Unless we tackle the latter, the former will be harder to bear.” 

But assuming you are planning to retire, most pension pots are simply not big enough to sustain a long-term retirement. 

In the UK, £61,897 is the average amount sitting in pension pots after a lifetime of saving. That’s an equivalent of only £2,500 a year in income – so even if you add the state pension, you’ll still be well below the current minimum wage. 

Moreover, only one in eight of all pension pots in the FCA’s data is over £250,000, which is the minimum most people are going to need for a significant retirement. 

It’s increasingly a problem, especially when figures suggest people are also withdrawing around 8% of their pension per year (around £2,200 per month on average). This is over twice as much as the recommended 3-4% per year, according to Patrick Collinson at the Guardian

If that scares you – and honestly, it’s made me have a bit of an awakening – then you may find talking to an advisor a helpful first step. Research shows that, on average, UK savers improve their pension wealth by £30,991 by taking advice – and it all adds up. 

It can also be a good exercise to track down your old pensions. Thousands are lost every year in pensions that people have forgotten – so it’s worth keeping track of them whilst you’re young. There are even platforms like Pensionbee or Profile Pensions that can help do the hard work for you – so there’s really no excuse. 

Women and minorities are also typically under-pensioned. 

If you thought the average was bad in general, you’ll probably be even more aghast when we start talking about the pension gap for women and minorities. According to Glamour, millennial women could face ‘retirement poverty’ due to the gender pay gap (and need to work 37 years longer to catch up with men). The gender pay gap currently stands at 15.5% in the UK, with the investment gap at a whopping 67%. No wonder then that the pension gap has widened to 40% in 2020. 

“Being at a statistical and practical disadvantage means that it’s absolutely vital for women to prioritise their financial health as soon as possible, rather than putting off thinking about how they will fund their retirement,” writes Clare Seal in another Glamour article. “It’s never too early – or too late – to plan for your pension.” 

Likewise, the ethnicity gap stands at around 24% – or £3,350 a year – worse off than other people their age. This rises to 51% between a female pensioner from an ethnic minority and a white male pensioner.  

The question of how to close the gap is one of the biggest challenges facing society today. And really, the best thing millennials like us can do to ensure we close the gap for our generation, is to take action now – taking control of our money and ensuring it’s working harder for us through our pension investments, ISAs and general investments as well. 


Who funds the world? Why women need to start investing

Equal Pay Day: The gender wage gap means women are now working for free

How has social media changed the way women invest

As young people thinking about our futures, we have a lot to think about.

Sometimes it can be difficult – especially with things like the climate crisis and global pandemics to distract us – to imagine that future where we’re relaxing in our later years, no longer working the daily grind and instead letting ourselves enjoy a retirement. For some of us, it might feel like it’s one of those unimaginable goals, with such big numbers involved that it doesn’t feel tangible. 

But building wealth and saving for retirement is entirely possible because of how far off it is right now. 

If you’re thirty years from retirement (in an ideal world), then having multiple streams of income – active and passive – can help you really grow your savings. An extra bump from a dividend could be split between short-term saving pots and say your pension. A side hustle that brings in an extra income could become your spending money whilst your salary goes into pensions and investments. 

Looking into investment opportunities is also a great way to help your money grow. Whilst all investing comes with risk – the value of an investment can go up as well as down – putting savings into a stocks and shares ISA or a general investment account can help you beat things like inflation as well as see your money grow with the market. 

For significant sums of money, you may also like to discuss your options with a financial advisor, planner or private banker. At ikigai, for example, speaking to your relationship manager can help you work out the best route for you to think about your money. 

Likewise, learning about and paying attention to things like your taxes will allow you to consider the best way to maximise your income and investments. This is particularly true for things like tax allowances and reliefs, as well as capital gains tax – the tax on the profit made when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value. You can read our ikigai guide to tax here. 

Ultimately, the best thing we can do for our long-term financial health and our futures is to plan ahead. Even when it seems daunting or distant right now. Longevity is a financial issue that we do actually have some control over – and preparing for it is something that gives us control, freedom, and something exciting to look forward to.


Six ways to deal with overwhelming financial goals

Passive income: making your money work for you

The ikigai guide to ISAs

Tax 101: A short primer on what you need to know about tax

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We built ikigai specifically for those who want to bring their lifestyle to the next level, by taking better care of their finances.

ikigai beautifully combines wealth management and everyday banking in one single app. And by doing so, it creates a whole new world of opportunities.

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Maurizio & Edgar, Co-Founders, ikigai

When investing, your capital is at risk.

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Tags: , Last modified: 20 August 2021