A future of degenerative diseases, physical frailty, nursing home care costs and financial strain. The realities of an ageing population sound unbelievably bleak and, without planning, they might be. How can you make sure that you don’t struggle with cost of living too long? In this weeks blog, we explore your options for funding your retirement years.
Now more than ever, it’s essential that you start thinking about how you are going to fund your retirement. The longer your view and the earlier you seek advice and take action, the better your prospects for living out your dotage in comfort.
It’s imperative too that you acknowledge that your circumstances could change in the future. Living too long brings with it the risk of developing a degenerative condition such as Alzheimer’s disease, vascular dementia, ALS or Parkinson’s disease (to name but a few!). If you have put off planning for your older years, you may find yourself in a position where you are unable to make important financial and practical decisions. Considerations about your long-term care and finances could fall to your relatives or even the State. I can’t imagine that’s a happy prospect for anyone.
If we look at Alzheimer’s disease and dementia, the severity of this problem is brought into sharp relief. Professor Brian Lawlor, consultant psychiatrist for older people at St Patrick’s and St James’s, spoke at a conference several years ago about the future of Alzheimer’s disease in Ireland.
In 2008, Lawlor said 38,000 people in Ireland had been diagnosed with Alzheimer’s disease and dementia. Death rates from Alzheimer’s grew by 33% between 2000 and 2004 alone, whereas the risks from strokes and heart disease remained fairly consistent.
According to Professor Lawlor, by 2050, one in every 85 people in Ireland will have Alzheimer’s disease and 40% of those will need high-level care in nursing homes.
The Dementia Services Information and Development Centre (DSIDC) says that the figure has already grown to 42,000 people in Ireland currently living with Alzheimer’s and other forms of dementia. It also references a study which predicts dementia cases in Ireland will rise to up to 140,000 within the next 30 years. Dementia is intrinsically linked with ageing; experts tell us that by the time we’re 90 – which will be the reality for many of us – the risk of developing vascular dementia is 50% higher than when we were in our 60s.
Would your finances provide the care you need or alleviate some of the burden on your family as carers if you were to develop a degenerative disease as a result of living well into old age?
How can you protect yourself against the cost of living too long?
As we’ve discussed in our recent blog, the cost of long-term care is one consideration. You will also need to think about your future income and outgoings, your investment portfolio and what you want to leave behind for your beneficiaries when you die.
The main consideration, of course, is building a fund for your retirement in the most efficient manner.
If that fund is through a pensions’ product, then you will typically have two choices: a) buy an annuity or b) invest in an Approved Retirement Fund (ARF).
An annuity is designed to give you a stable long-term source of income to live on throughout your retirement. You will typically pay a lump sum upfront, usually with money accumulated from your pension fund. If the pension fund is worth X on retirement, it will buy you an annuity or pension for the rest of your life for Y. An annuity can be index linked, have a minimum guaranteed pay out period, and potentially provide a pension for your spouse after your death.
There is a wide range of annuities to choose from, including Fixed, Indexed Linked or Enhanced, meaning your pension fund will buy you a bigger pension is you are deemed to be in poor health.
One consideration is that a low interest rate environment can impact negatively on buying an annuity but there may be the potential to delay purchasing annuity for a couple of years when interest rates may have improved.
Also, it’s important to be aware that once you are tied into an annuity, you will not be allowed to change it, which means that you will be stuck on a fixed income. How will you cope with this if you circumstances change?
Approved Retirement Funds
Under an Approved Retirement Fund (ARF), money from your pension plan is invested during your retirement so that it still has the opportunity to work for you and grow. As you could potentially live 30-plus years into your retirement, investing long-term is a reasonable consideration.
Typically, the ARF providers will pay out an annual percentage of the value of the fund as an income. You can also make withdrawals and partial encashments from the fund (subject to tax and certain terms and conditions).
With an ARF, whatever is left in your fund can be transferred to your dependents in the event of your death.On the flipside, you may feel an ARF isn’t the right choice for you if you are risk adverse or you have taken out a larger tax-free cash sum from your pension. You may prefer the stability of the monthly income provided by an annuity.
The decision you are faced with at retirement will inevitably have a major impact, either positive or negative, on your finances long term. It’s vitally important that you make the best decision based on your circumstances and needs. Doing nothing is not an option.
It might be possible to split your retirement planning across several options to spread your income and the risks associated with different investment-types.
We would always recommend that you seek independent financial advice to help you identify your best options based on your individual needs and circumstances. The earlier in life you are able to do this, the better for your long-term financial security and peace of mind.