Could you afford to live to 100?

Brits are living longer than ever, with the number of centenarians soaring by nearly 90 per cent over the past two decades, according to the Office for National Statistics (ONS).

The number of people aged 90 and over has also jumped by more than half (55 per cent) since 2005, reaching 645,000.

But living longer raises important questions about money, from funding retirement to paying for later-life care.

With millions of people under-saving for retirement, how many of us could actually afford to live long enough to get our telegram from the King?

Bigger retirement challenges

“Living longer is something to celebrate, but it also brings some significant financial challenges. The most obvious is that our retirement savings may need to stretch further than ever before,” says Marianna Hunt, personal finance specialist at Fidelity International.

“Someone retiring at 65 could potentially need their pension to last another 30 or even 40 years.

“That’s a long time to eke your money out, particularly when you factor in the effects of inflation.”

Unfortunately, many of us are not particularly good at estimating how long we’ll need our money for. Fidelity research found that nearly three in ten (28 per cent) of UK pre-retirees aged 50 and over don’t know how long their retirement savings will last.

How much money do you need?

There is no magic pension pot figure that works for everyone. Your spending, housing costs, lifestyle and other income all make a difference. But some simple sums show the scale of the challenge.

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Suppose you want an income of £30,000 a year and retire at 65. Living to 90 would mean 25 years of income, totalling £750,000. Living to 100 would mean 35 years, or £1.05m.

These are just sum total figures, not a guide to the actual pension pot you need, because they ignore investment growth, inflation, tax and the state pension.

But they illustrate why an extra decade of retirement can make such a difference.

From April 2027, the state pension is a maximum of just over £13,000 a year. Someone receiving the full amount and aiming for £30,000 a year would need to find the remaining £17,000 from other sources. Over 35 years, that shortfall adds up to more than £610,000 before allowing for investment returns or inflation.

Build a pension and plan your withdrawals

Sarah Coles, head of personal finance at AJ Bell, says planning for longer lives starts with building a big enough pension pot.

“It’s a good idea to use a pension calculator to see what you’re on track to have built by retirement, and whether it will be enough for the income you want – even if you live far longer than average. If you have a shortfall, you could consider boosting contributions.”

A pension calculator can help you understand whether your current savings rate is likely to support the lifestyle you want throughout retirement, including if you live well into your 90s or beyond.

It’s also worth thinking about how you’ll take an income from your pension. Drawdown allows you to keep your money invested, offering potential growth but also the risk that your savings could run out.

Taking too much from your pension in the early years of retirement could leave you short later on. This is particularly important if markets fall while you’re withdrawing money, a risk known as sequencing risk.

“You can get around this with a variable withdrawal strategy – so you only take a sensible amount each year based on things like investment performance and life expectancy,” says Coles, “However this strategy can be complicated, so you may want to take financial advice. Alternatively, you might opt to take a fixed percentage of the pot, but revisit it regularly to make sure you’re not eroding your pot too quickly.”

Whatever your approach, review withdrawals regularly and use a pension calculator to test whether your plans could last into your 90s and beyond.

Consider an annuity for certainty

An annuity provides a guaranteed income for life, which can help cover essential bills whatever happens to investment markets.

However, a fixed income can lose spending power as prices rise, while inflation-linked annuities generally start at a lower rate.

Clare Moffat, pensions and tax expert at Royal London, says: “People should consider whether a blend of solutions could provide greater security, for example using part of their pension to secure a guaranteed income through partial annuitisation while leaving the remainder invested through drawdown.

“The key is ensuring that retirement income remains sustainable for the long term, giving people the confidence to enjoy retirement without worrying about running out of money later in life.”

Don’t forget the care bill

One of the biggest risks to retirement savings is needing care in later life. Costs vary depending on location and the level of support required, but it is worth considering how you would pay if you did.

“Lifestyle outgoings might moderate in the later phase of retirement,” says Lucie Spencer, financial planning partner at Evelyn Partners. “But these could be replaced by other costs such as domestic, residential or nursing care, medical and heating costs.”

Living to 100 may be something to celebrate, but it pays to plan for the possibility.

The earlier you check whether your pension can stretch the distance, the more time you have to plug any gaps and enjoy a longer retirement without worrying about running out of money.

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