As life expectancy increases, so does the length of time needed to stretch your income in retirement. Taking the right steps now can help you afford the lifestyle you want for as long as you need.
Today, people can expect to live into their 70s and beyond, and life expectancy is continuing to rise. The European Commission’s 2015 Ageing Report predicts men are, on average, likely to live an extra seven years by 2060 to reach 84, and women an extra six years to reach 89.
While this is generally a positive trend, it comes with some downsides at both a personal and state level. Simply put, can we afford the cost of living longer?
From a personal point of view, you can start gauging whether your resources are on track to last your lifetime by considering some key questions.
How long will you need your money to last?
This is a sobering question and not one most people can answer with certainty. Underestimate this, however, and your money could run out too soon, leaving you unable to live the lifestyle you want. No-one wants to be forced to reduce their quality of life or benefits like private healthcare, especially in their later years.
How much will you need?
If you are happy with the income you are receiving now, you probably have your answer. You may want just enough each month to live comfortably, or a bit extra so you can afford some luxuries. You might even settle for a modest income so long as you have access to ‘rainy day’ funds. If you are still employed, you need to consider what happens when you stop working. Will your pensions or savings be enough to replenish that income and sustain your existing lifestyle? Does it need to, or will you cut back when you retire?
Remember to factor in the effect of inflation on reducing your spending power each year. Say, for example, you typically spend €5,000 a month. Assuming an inflation rate of 3% a year, in 10 years’ time you could need about €6,720 a month to maintain the same spending, and €9,030 in 20 years.
How much do you want to leave behind?
You also need to consider your legacy. If you want to leave something to your family, you need to make sure you do not spend it in your own lifetime, without compromising your quality of life.
Making your pension savings last
Your pension is a key part of your financial security in retirement. Remember, you could live for 30 years or more after you reach pensionable age.
If you are relying on your pension savings to provide an income for life, you need to be sure that whatever you decide to do now will leave enough to go the distance. For example, just because you may be able to withdraw as much of your pension as you like in cash under the new UK pension freedoms, it does not mean that you should. With something as important as your pension, you should seek expert advice on the best course of action for your particular objectives and circumstances.
Making your investments last
It is important to make sure your savings, investments and assets are working as hard as they can for you, and that they are protected from unnecessary taxation. For example, are you making the most of the tax-efficient opportunities available in Portugal? Or are you holding on to UK assets that make you fewer gains and cost you more in tax than alternative investment options?
Do not underestimate inflation here too. While it is tempting to go for low-risk investments in your later years, your capital still needs to keep pace with inflation, and cash in the bank is unlikely to do this. Your financial adviser can recommend an appropriate, diversified investment strategy tailored for you.
Limiting the effect of taxation
One side-effect of rising life expectancy is a general trend for tax rises. That’s because the greater the proportion of older people in a population, the more money the government needs to pay for state pensions and services like healthcare. This does not just affect the UK.
There are arrangements available to expatriates living in Portugal that can legitimately minimise taxation. Reducing the amount of tax you have to pay will make your money go further and help fight the effects of inflation. You can even take steps to reduce the amount your heirs will have to pay in inheritance tax and maximise the value of your legacy.
To achieve this, it is essential to take personalised, professional advice. Good financial planning can provide you with what you want for as long as you need, so you can focus on enjoying the long, comfortable retirement you always wanted.
By Gavin Scott
Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. | www.blevinsfranks.com
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