Source: Bloomberg, Netwealth
Think of the damage that inflation could do to funds which may be needed for longer than you expect.
Regular inflation is one thing, but we should also be mindful of the extra costs that living longer will incur – such as care homes. According to a Telegraph Money report2, and citing analysis by healthcare research specialists LaingBuisson, the average cost of a care home place has almost doubled in two decades, with care fees rising roughly 4.4% a year and in some cases 5.4% a year.
Our own spending (our personal inflation rate) can fluctuate, too, and we need to prepare for the effects of our expenditure rising, then perhaps levelling off or falling, before increasing again. You may find it helpful to factor in potential inflation shocks by modelling for a range of outcomes here.
Steps you can take to make your money last longer
While the cost of living is outside of our influence, and our expenditure could fluctuate, some factors in maximising a retirement pot are easier to control.
Be aware of fees. Paying higher wealth management fees has a surprising but meaningful impact over the long term. See how much more money, and how many more years of a comfortable retirement, you could have just by paying around 1% less in annual fees.
Stay invested. Staying invested over time and not trying to time the market makes a big difference. Research produced by Dalbar Associates - and detailed here - shows that over a 30 year period average US investors “timing the market” would have received annual returns of 3.94% a year. The average annual market return over that timeframe was 10.16%, a tremendous difference if compounded over many years.
Choose ‘suitable’ investments – and risk. Assessing your preferred individual risk tolerance is crucial to achieving your goals. A typical investing maxim recommends that as we get older we should invest in less risky assets. But if you know you may live longer you may be able to afford to take on more risk when you consider your time horizon and personal circumstances.
Consider annuities. Annuities can form an important part of a balanced retirement pot. Even though annuity returns are not what they were, they do offer the security of a guaranteed sum every year, whatever happens to the economy and financial markets.
These are just some of the factors to consider when preparing for a retirement that may last longer than we think. To a great degree, they are aspects of our finances we can influence, and we do well to focus on ‘controlling the controllables’ where possible.
Netwealth’s modelling tools can help you to better understand the impact of living longer and the effects of inflation on your retirement so that you can make better informed decisions about the funds you may need for a longer life.
1 Source: Bloomberg, Netwealth. Return series are calculated as the total return on the UK 1m LIBOR Cash Index, deflated by RPI, for UK Cash. The Netwealth Risk Level 4 return series is the simulated historical performance of the current strategic allocation, net of management fees and underlying fund costs, deflated by RPI. Past performance is no guarantee of future performance.
2 Telegraph Money report ‘Why care costs are spiralling at up to twice inflation’
Please remember that when investing your capital is at risk.