How to make your money last (no matter your age)

How do you make your money last as long as you do? By 2050, an estimated 3.67 million people globally are expected to reach the age of 100.¹

Retirement is no longer a 15- or 20-year phase of life - it could span three decades or more. That means your savings need to work harder and last longer than ever before.

However, in our report, The Longevity Revolution: Preparing for a New Reality, developed in partnership with the National Innovation Centre for Ageing (NICA), we found that over a third (35%) of those aged 50+ in the UK are facing a retirement shortfall of at least a decade when measured against the average life expectancy in their country.

When measured against a potential 100-year lifespan, almost three-quarters (74%) of those aged 50 and over in the UK are unprepared by at least a decade.

• Get updates on markets, ISA funds, pension saving and much more

How prepared are you?

We have looked at three example scenarios of people at different ages. We assessed the following:

• What are their chances of living to 100?
• Will their money run out before age 100?
• If so, what can they do to make sure it lasts?

Assumptions

• In each case, we assume their salary while working and their spending increase by 2% per year to account for inflation.
• We assume investment growth of 5.7% per year after fees and that there is no prolonged stock market crash - although this is never guaranteed.
• These scenarios were run using Fidelity’s cash flow modelling tool and will not exactly reflect reality.

1. Just getting started - a young woman aged 25

Her average life expectancy is 88 years. However, she has a 1 in 8 chance of living to 100. She has an average pension pot for someone this age (£5,500, according to the ONS - Office for National Statistics)².

Will her money last?

We assume she is on a salary of £40,000 and contributing 5% of that to her pension, with her employer adding an extra 3%. She spends £25,000 per year, rising with inflation. She retires at 68 with a full state pension.

Under this scenario, she could enjoy a “moderate” retirement and not run out of money before age 100. A moderate retirement, according to trade body Pensions UK’s definition, includes a three-year-old small car replaced every seven years, a fortnight 3* all-inclusive holiday in the Mediterranean, and a long weekend in the UK each year.

That lifestyle would currently cost £31,700 per year. However, annual inflation of 2% would mean it costs our 25-year-old around £75,000 a year in 2069 when she retires.

This highlights the benefits of starting early with a pension and staying invested. This should allow investment growth to work its magic over decades and help savings to keep pace with rising prices.

However, our 25-year-old might want a “comfortable” lifestyle in retirement, which, according to Pensions UK, includes a fortnight 4* holiday in the Med, three long weekend breaks in the UK and higher spending on groceries (a lifestyle currently costing £43,900 a year).

If she adopted a “comfortable” lifestyle in retirement, she would risk running out of money by age 84. She would need to reduce her post-retirement spending by £10,600 per year in today’s money (to £33,300 a year) to ensure her pension value did not reach zero before age 100.

Tips on how to make it last

However, even paying just a little extra into her pension each month throughout her career could make a big difference to how long her pot lasts.

If she paid an additional 3% into her pension (so a total 8% personal contribution), she would run out of money at age 89 instead, assuming she was spending a “comfortable” level.

She would need to reduce her post-retirement expenditure by much less (£6,020 per year) to avoid running out of money before age 100. That means she could spend around £38,000 per year (in today’s money) in retirement - approximately £5,000 more than if she had not made those additional contributions.

What’s more, paying an additional 3% of her salary into her pension would only cost her £1,200 a year (or £100 a month) while she is earning £40,000 - although this will increase with her salary.

Of course, the reality is likely to be more complicated than this. This 25-year-old may well face career gaps, which could lead to reduced pension savings. Our research suggests almost a quarter - 23% - of women say their earning potential has been impacted by taking time out of work to care for children.³

If this is the case, options might include a partner contributing to her pension while she is not working or increasing her pension contributions at other points of her life.

She might decide to go self-employed at some point and no longer benefit from being auto-enrolled into a pension or from employer contributions. If that happens, she should try hard to maintain the full 8% contribution to her pension to ensure she still has enough money to last.

Any extra contributions to her pension while she is young will have a significant impact on her pot size at retirement. When she is looking for jobs, it would be well worth taking pension contributions into account as well as salary.

If our 25-year-old had an employer who matched any additional pension contributions she makes, she would only need to contribute an extra 1.5% (or £50 a month) to get that overall boost of 3% that would make a big difference to her retirement income.

2. The crunch years - a 40-year-old man with a young family, also helping elderly parents

His average life expectancy is 84 years. However, he has a 1 in 20 chance of living to 100. He has an average pension pot for someone this age (£39,500, according to the ONS).

Will his money last?

We assume he earns £50,000 per year and contributes 5% of that to his pension, with his employer adding an extra 3%. He spends £30,000 per year, rising in line with inflation. He retires at 67 and receives a full state pension from age 68.

If he enjoys a “comfortable” lifestyle in retirement (spending £43,900 per year in today’s money), he risks running out of money after only 13 years: at age 80. 

Even if he contributed an extra 3% to his pension each year while working, he would still run out of money by age 82.

On a “moderate” retirement income too, he would struggle - which shows the challenges of waiting till later in life to prioritise pension savings. Spending £31,700 a year in today's money, he risks running out of money at age 95.

Tips on how to make it last

In the “moderate” scenario, he would need to reduce his post-retirement spending by around £1,500 per year to ensure his funds did not reach zero before his 100th birthday.

Happily, here, the extra 3% pension contribution could make a big difference and allow him to enjoy a moderate retirement without running out before 100.

On a salary of £50,000, paying an extra 3% into his pension should only cost him £1,500 a year, or £125 a month.

Of course, the “squeezed 40s” are often the hardest time to save. Mortgage repayments, commuting costs, childcare and supporting elderly parents can all make it very tempting to overlook your pension. 

However, ONS data suggests that an average person’s pay peaks at age 47, so it’s really important to make the most of your peak earnings by putting what you can into pensions and ISAs⁴.

Automating your savings - for example, by setting up a direct debit to transfer money into an ISA as soon as your salary is paid - can help to avoid ‘lifestyle creep’, where your spending creeps up with your salary.

Getting a new better-paid job, a promotion or a bonus can be a good moment to up your pension contributions.

Shopping around for the best mortgage rate or speaking to a broker who can help you find a better deal could help in bringing costs down - boosting excess savings that you can put towards the future.

If you’re taking time out to care for children or elderly parents, you may be eligible for National Insurance credits that bump up your state pension record. In some cases, these will be given to you automatically and, in other cases, they won’t, so it’s always worth checking. Not claiming them could cut your state pension payments in future.

While ONS data shows that average pay peaks at age 47, it also declines after that, so it’s worth considering courses or qualifications that can help you upskill and maintain or increase your earnings potential.

As with the 25-year-old, generous employer pension matching can make a big difference, so consider pension contributions when comparing job offers.

3. The third act - a 60-year-old woman approaching retirement

Her average life expectancy is 87 years. However, she has a 1 in 16 chance of living to 100. She has an average pension pot for someone this age (£137,800).

Will her money last?

We assume she is earning £40,000 and contributing 5% of that to her pension, with her employer adding an extra 3%. She retires at 67 with a full state pension.

If she spends £25,000 per year from age 60, rising with inflation, her money will run out by age 94. Even if she increased her pension contributions while working to 15%, she would still run out of money by age 96.

Spending £25,000 per year falls somewhere between Pensions UK’s “minimum” and “moderate” retirement. The minimum retirement includes a week-long holiday in the UK each year but no car and smaller budgets for clothes, meals out, and gifts for family.

To ensure her money lasts to age 100, she has two main options:

1. She could reduce her annual expenditure, from today, to £23,700 - a spending cut of £1,300
2. She could work one extra year, to age 68

You can see that, once you hit your 60s, even significant increases to your pension contributions (e.g. from 5% to 15%) won’t make a huge difference to how long your money lasts. They certainly help - in this case giving our 60-year-old an extra two years - but it is no silver bullet.

Whereas, working just one extra year makes a significant difference in ensuring her money lasts to age 100. That’s because she has an extra year of pension contributions, an extra year of investment growth, and one less year of having to draw down on her savings.

She could even choose to defer her state pension by one year. Delaying taking the state pension by one year could boost her payments by around 5-6% (roughly £700 a year at today’s rates).

Once you enter retirement, you need a careful strategy for making your money last.

Buying a lifetime annuity is one way that you can hedge against longevity risk. These guarantee to pay you an income for life, no matter how long you live - which removes the risk of running out of money entirely.

However, it’s worth remembering that a level annuity (one that pays you the same amount each year) can lose purchasing power because of inflation. You can buy annuities that go up with inflation or by a pre-agreed amount (e.g. 2.5% a year), but the rate you get will be lower.

What’s more, if you use all your savings to buy an annuity, there will be nothing to pass on to your loved ones.

The other option is to put your pension savings into drawdown and take money from those investments as and when you need it. There is the risk that you’ll run out, which is why it’s important to have a sustainable withdrawal plan. But any unspent money when you die can be passed onto your heirs.

Some people take a blended approach. You could use some of your pension to buy an annuity, providing security, and leave the rest in drawdown to benefit from any future investment growth.

If you do go for the drawdown option, it’s crucial to get the right balance between risk and reward. Taking on too much risk in the hope of better returns can leave you vulnerable in a market downturn. But not taking enough risk and holding too much in cash and/or bonds can be a drag on returns and mean your money fails to grow at the pace you need.

Planning for, and making your money last during, retirement is an extremely complex area, and, for many people, it would be worth seeking professional advice.

The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.

Our team of retirement specialists can also provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.

This article was originally published in The Daily Telegraph.

Sources:

¹ Pew Research Centre, March 2020
² ONS figures on pension wealth
³ Research was conducted by Opinium Research commissioned by Fidelity International. The survey is based on responses of 2,000 UK adults and was carried out between 14th and 27th May 2024.
⁴ The Office for National Statistics (ONS) Annual Survey of Hours and Earnings (ASHE)

Got a burning question you want to ask? Why not drop us a line. Click here to ask your question.

• Read: What Warren Buffett said – and did – during market turmoil
• Read: How quickly will UK pension ages rise?
• Read: 5 reasons to worry less about your pension as markets dip

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). Tax treatment depends on individual circumstances and all tax rules may change in the future. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.