Retirement Concerns by Andy

The Longevity Revolution: Planning for a Longer Retirementd Episode

• Andrew Barrett

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The article, titled "The silent retirement risk we all ignore - and how to manage it," presents research showing that many people aged 50+ are underestimating their lifespan by ten years or more, potentially leading to them running out of savings. Using a case study, the author illustrates how a person's retirement fund could be depleted years before their actual life expectancy. The source offers several strategies to mitigate this risk, including reducing yearly expenditure, working for a longer period, and utilizing annuities or property wealth to secure income for a longer life. The document also contains extensive navigational menus and disclaimers typical of a financial services website, encouraging readers to seek advice and use various Fidelity resources like SIPPs and financial planning tools.

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SPEAKER_00:

Welcome to the deep dive. If you're thinking about retirement, or maybe just really curious about making money last for, well, decades, you've probably hit that big, stressful question. How do I actually get sustainable income without, you know, burning through everything I've saved?

SPEAKER_01:

Yeah, it's a huge one. We looked at a whole stack of sources on this, actually prompted by a listener. Let's call him Tom. Now, Tom had saved well, but he found that standard advice, like the famous 4% rule, it just made him feel uncomfortable. He wanted reliable cash flow. Specifically, he felt he needed about a 6% yield from his portfolio to feel secure. For him, selling off bits of his investments, that felt like failing. Dividends, though, they felt like a proper paycheck.

SPEAKER_00:

And that instinct is so, so common. I mean, when the salary stops, you naturally want your investments to somehow replicate that study check, right? Exactly. But what the research really highlights, and what we're going to dive into, is that chasing that high income, especially through dividends, it's often a trap. It can lead you to take on way too much risk and honestly get worse results. Okay, so that's the first big pitfall we need to unpack. Why that high dividend strategy can be, well, deceptive.

SPEAKER_01:

Yes. And the second, equally critical thing, is confronting what I think is the biggest, quietest danger in retirement planning. Just underestimating how long you're actually going to live, that longevity risk. It changes every single calculation you make.

SPEAKER_00:

Right. Okay. Let's start with Tom's situation then. He had a 300,000 pound portfolio aiming for 18,000 pounds a year. That's the 6% yield he wanted. Now, the sources point out maybe 30 years ago, getting 6% was, well, it wasn't that hard.

SPEAKER_01:

No, it really wasn't. It was pretty standard. A simple globally diversified portfolio, maybe 60% stocks, 40% bonds, that would likely have kicked off that kind of yield three decades back. But uh that's just not the world we're in anymore.

SPEAKER_00:

And here's the figure that really jumped out from the data today, that exact same kind of balanced 60-40 portfolio, it's yielding only about 2.3%. Wow.

SPEAKER_01:

Yeah, big drop.

SPEAKER_00:

It's huge. And it's mostly down to low global interest rates, squashing bond yields, plus high stock valuations, making dividend yields look smaller as a percentage of the price.

SPEAKER_01:

Aaron Powell So if Tom wants that 6% today, he can't just rely on a standard portfolio. He'd have to do something pretty extreme, something really concentrated. And that takes us right to the core problem the dividend illusion.

SPEAKER_00:

Aaron Powell The illusion. Okay, break that down.

SPEAKER_01:

Okay, the central idea here, it's actually quite simple when you boil it down. Getting paid a dividend doesn't actually make you any better off in total.

SPEAKER_00:

Hang on, how? Because Tom and lots of people see that cash hitting the account. That feels real. That feels like comfort.

SPEAKER_01:

Aaron Powell It feels real, absolutely. The psychological comfort is strong. I get that. But mathematically, let's take an example. Say a company's share is priced at uh 10 pounds.

SPEAKER_00:

Okay.

SPEAKER_01:

And it pays out a one-pound dividend. What happens instantly to that share price?

SPEAKER_00:

It has to drop, right?

SPEAKER_01:

It drops straight down to nine pounds. You haven't actually gained overall wealth. You've literally just moved your own money from the company's value your capital tied up in the stock.

SPEAKER_00:

Into your bank account as cash.

SPEAKER_01:

Exactly. It's just shifting it from one pocket to another. Yeah. It's a zero sum game for your total net worth.

SPEAKER_00:

Aaron Powell, but surely that cash in hand, isn't that psychological benefit worth something? Especially if you're worried about markets.

SPEAKER_01:

The mental comfort is powerful, no doubt. But it doesn't change the underlying math. We found this really clear example in the research. A stock closed one day at 217.51 pence.

SPEAKER_00:

Right.

SPEAKER_01:

The very next morning, it opened at 203.30 pence. That's a drop of 14.21 pence. And guess what the dividend payment was? Made just before the market opened.

SPEAKER_00:

Let me guess. Pretty close to 14 pence.

SPEAKER_01:

13.5 pence. Almost the entire drop was just the market instantly pricing out the dividend that had been paid. It wasn't new wealth created.

SPEAKER_00:

Okay, okay. So if it's just moving my own money around, that must mean. It also doesn't offer any special protection if the market tanks. That's another big belief, isn't it? That dividends are somehow safer in a crash.

SPEAKER_01:

That's exactly right. It offers zero extra protection against losing capital value. Let's run Tom's scenario again. His 300,000 pounds high dividend portfolio crashes 50%. It's now worth 150,000 pounds.

SPEAKER_00:

Oh.

SPEAKER_01:

Yeah. He still needs his 18,000 pounds income, so he takes the dividends. He's left with 132,000 pounds invested.

SPEAKER_00:

Okay, makes sense.

SPEAKER_01:

Now, picture an identical portfolio, but one that doesn't focus on dividends. It also crashes 50% to 150,000 pounds. Yeah. Tom follows a total return approach. Instead, he simply sells 18,000 pounds worth of shares to get his income. How much is he left with?

SPEAKER_00:

Uh-huh. 132,000 pounds. The exact same amount.

SPEAKER_01:

The exact same amount. The dividend stream itself did absolutely nothing to shield his capital compared to just selling some shares when needed. You still eat into your capital in a downturn, either way, if your withdrawal exceeds the portfolio's actual return.

SPEAKER_00:

Right. This leads us to something else that I think really confuses people. You see these charts, historical data, showing that companies paying high dividends have actually outperformed companies paying low or no dividends. Over the long run, anyway. Why wouldn't you chase that?

SPEAKER_01:

Aaron Powell Ah, yes. That's the second point that always trips people up. And it looks convincing on the surface, but it's a classic case of uh correlation not equaling causation.

SPEAKER_00:

Aaron Powell Meaning the dividends themselves aren't the reason for the outperformance?

SPEAKER_01:

Aaron Powell Precisely. You have to look underneath the dividend payment. When researchers isolate the factors, the so-called dividend magic, it just vanishes.

SPEAKER_00:

Aaron Powell So what is causing it then if it's not the dividend?

SPEAKER_01:

Aaron Powell It's the type of companies that tend to pay those steady, often higher dividends. They usually share certain characteristics. They're often profitable, they generate consistent cash flow, they have strong balance sheets.

SPEAKER_00:

Okay, solid businesses.

SPEAKER_01:

Solid businesses, exactly.

SPEAKER_00:

Yeah.

SPEAKER_01:

And very often they fall into what investors call value stocks companies whose shares seem to be trading at a lower price relative to their sort of fundamental worth or earnings. These underlying quality and value factors are what have historically driven the better returns, not the act of paying the dividend itself.

SPEAKER_00:

And the danger then, if you try and capture that by only looking for high yield, is you end up with a really lopsided portfolio.

SPEAKER_01:

Extremely lopsided. You sacrifice diversification, which is, you know, the one free luncheon investing.

SPEAKER_00:

We saw some numbers on this that were pretty stark. If you look at the S P 500 index, all those big US companies, only 28 out of over 500 companies currently pay a dividend yield of 5% or more. 28.

SPEAKER_01:

That's incredible, isn't it? And think about what that means for concentration. Those 28 companies, they make up just a tiny slice, maybe 2%, of a total value of the entire index. Wow. So if you force your portfolio to hit, say, a 6% income target only from dividends, you're basically throwing diversification out the window. You're building this incredibly focused and likely much more volatile portfolio. You're exposing yourself to potentially much bigger drops, 40%, maybe even 50% drawdowns than you'd face with a properly diversified approach.

SPEAKER_00:

So the conclusion on the income strategy part seems clear then?

SPEAKER_01:

Yeah, I think it boils down to this. A total return approach is generally simpler, safer, and actually allows you to potentially draw more income sustainably over the long run.

SPEAKER_00:

And just to clarify, total return means you focus on the overall growth of your portfolio, capital gains, plus any dividends or interest, and then you just sell off whatever assets you need to create the income you've decided on.

SPEAKER_01:

Exactly. You use a well-diversified mix of assets, and you decide how much income to take based on your plan, rather than letting the amount of dividend the portfolio happens to produce dictate your strategy and your risk level.

SPEAKER_00:

Okay. So if we've sorted how to draw the income, focusing on total return, diversification, that brings us smack bang into the next huge issue, which is how long do we actually need this money to last? The time problem. Yes. Let's shift to that silent risk longevity. We are just, it seems, consistently bad at guessing how long we'll live.

SPEAKER_01:

Terribly bad. And it's such a critical flaw in retirement planning. One study we looked at was striking. It suggested two out of every five people aged 50 plus are under planning for retirement by 10 years or more.

SPEAKER_00:

10 years.

SPEAKER_01:

Yeah. They're budgeting for maybe 20 years of retirement.

SPEAKER_00:

Yeah.

SPEAKER_01:

When the reality could easily be 30 years or even longer.

SPEAKER_00:

The UK statistics you pulled out were particularly uh eye-opening on this.

SPEAKER_01:

They really were. On average, UK adults expect their retirement savings to last about 19 years after they stop working. 19 years. But now take a woman retiring today at age 66. Her average life expectancy is another 22 years, already longer than the savings expectation. But here's the kicker.

SPEAKER_00:

It was more.

SPEAKER_01:

Oh yeah. She has a one in four chance of living to age ninety-four, and a one in ten chance of reaching ninety-eight. Suddenly, planning for just nineteen years looks, well, incredibly risky.

SPEAKER_00:

Wow. One in four are reaching ninety-four. That really changes the picture, doesn't it?

SPEAKER_01:

It changes everything. I mean, I certainly wasn't factoring those odds in originally. If you underestimate your lifespan by that much, you inevitably overestimate how much you can safely spend each year right from the beginning.

SPEAKER_00:

Let's make that concrete. You had an example, Sarah.

SPEAKER_01:

Yeah, let's use Sarah. Say she's 50 now, average salary, built up a reasonable pot, maybe 100 pound K so far, aiming for more by retirement. If she plans based on that common 19-year retirement time frame, maybe retiring at 66 and planning till 85, her calculations might suggest she can spend, say, 29,000 pounds a year, including her state pension.

SPEAKER_00:

Okay. 29,000 pounds, I think it's like a decent amount.

SPEAKER_01:

It does. But now, what if she recalculates based on a higher probability of living much longer, say, to age 100? To make the money last that long, she has to cut her spending right from day one down to maybe 26,000 pounds a year.

SPEAKER_00:

Ah, so that 3,000 pounds difference per year, that's the longevity tax almost, the price of planning realistically.

SPEAKER_01:

Aaron Powell That's a good way to put it. It's the forced reduction you have to accept upfront to avoid that terrifying prospect of running out of money when you're, you know, 97 years old.

SPEAKER_00:

Aaron Powell That is definitely strong motivation to plan properly. So, okay, if you look at those odds, you accept you might live to 95 or 100. What can you actually do about it? What are the strategies the sources suggest?

SPEAKER_01:

Aaron Powell Well there are basically four main levers you can pull. The first one is perhaps the most obvious, if not the easiest, to just accept a lower level of spending. Like Sarah moving down to the 26,000 pound model to make the capital last.

SPEAKER_00:

Right. Spend less.

SPEAKER_01:

Second, and this one often has a huge financial impact, is simply working longer.

SPEAKER_00:

Aaron Ross Powell Ah, delaying retirement.

SPEAKER_01:

Aaron Powell Exactly. Even just a few extra years can make a massive difference because of compounding returns on your savings, plus your drawing on the pod for fewer years. In Sarah's case, if she worked until age 68 instead of say 65 or 66, the calculations show she could potentially maintain that higher 29,000 pound annual spending level and still have enough to last until age 100. It's a really powerful multiplier. Trevor Burrus, Jr.

SPEAKER_00:

And there are non-financial benefits too, right? Keeping active.

SPEAKER_01:

Absolutely. We saw data showing something like 70% of people nearing retirement expect to work in some capacity afterwards. Partly because it keeps them mentally and physically engaged.

SPEAKER_00:

Okay. So spend less, work longer. What's number three? Getting rid of the risk.

SPEAKER_01:

Aaron Powell That's the idea. Strategy number three is insuring against living too long. And the main tool for that is an annuity.

SPEAKER_00:

Aaron Powell Right, where you give an insurance company a lump sum and they promise to pay you an income for life, however long that is.

SPEAKER_01:

Aaron Powell Precisely. You transfer the longevity risk from yourself to the insurer. And it's worth noting, the sources mention that annuity rates have actually been uh spiking recently, making them look more attractive than they have for quite some time.

SPEAKER_00:

Aaron Powell Interesting. So for Sarah, what might that look like?

SPEAKER_01:

Aaron Powell Well, based on her predicted pot at age 65, maybe around 225,000 pounds. She could potentially buy a fixed annuity, paying out somewhere in the region of 17,000 pounds a year pre-tax guaranteed for life. Aaron Powell Okay.

SPEAKER_00:

That's a solid baseline income for life. And the fourth strategy.

SPEAKER_01:

The fourth involves using your property wealth. This usually means one of two things. Either downsizing selling a larger home and buying something smaller and cheaper, freeing up capital, or looking into equity release.

SPEAKER_00:

Equity release. That comes with warnings, though, doesn't it?

SPEAKER_01:

It does. Big warnings. While it gives you cash up front, it's essentially a loan against your house. The interest compounds over time and can significantly eat into the value of your property, leaving much less or even nothing for inheritance. It needs very careful consideration.

SPEAKER_00:

So four main tools. But underlying all of them, the key seems to be actually making a plan.

SPEAKER_01:

Absolutely crucial. The difference in confidence is stark. One study showed 83% of people who actually sat down and made a retirement plan felt prepared physically and emotionally. Compare that to only 65% of those who hadn't made a plan. Planning itself brings confidence.

SPEAKER_00:

Okay, let's pull this back to Tom and the investment strategy. If he adopts the total return approach we talked about diversified portfolio, selling assets as needed, what kind of lower risk assets should be in that mix to provide some stability against stock market ups and downs?

SPEAKER_01:

Great question. Because a pure stock portfolio, even diversified, can be too bumpy for someone drawing income. You need those stabilizers. Bonds are the traditional anchor here.

SPEAKER_00:

Right. Government bonds, corporate bonds.

SPEAKER_01:

Exactly. Particularly high-quality government bonds like UK Gilts or U.S. Treasuries are seen as very safe havens. They generally have lower volatility than stocks and help smooth out the ride.

SPEAKER_00:

What else fits in that lower risk income-oriented bucket?

SPEAKER_01:

Well, for shorter-term needs and real stability, you have things like certificates of deposit CDs or fixed-term savings accounts. They offer fixed interest rates for a set period, and the principal is usually protected, often government insured, up to a limit.

SPEAKER_00:

So very safe, but maybe not huge returns.

SPEAKER_01:

Generally lower returns, yes, and your money is locked up for the term, so less liquid. But great for stability for money you know you'll need soon.

SPEAKER_00:

Anything else?

SPEAKER_01:

The sources also mentioned preferred stocks. These are kind of a hybrid between stocks and bonds.

SPEAKER_00:

How so?

SPEAKER_01:

They pay fixed dividends, often higher than the common stock dividends from the same company, and preferred shareholders get paid out before common stockholders if the company gets into trouble. So a bit more income security. The trade-off is they usually don't offer the same potential for price growth, for capital appreciation as common stocks do. They're another tool for balancing income and risk.

SPEAKER_00:

Okay. So bringing it all together then, thinking back to Tom's original problem, that craving for the 6% dividend yield, what's the final word on that?

SPEAKER_01:

I think the most crucial lesson really is this. Don't let the income your portfolio happens to produce dictate how you live or how much risk you take. That road often leads to too much concentration, too much complexity, maybe even lower long-term returns. Yes, instead, your life goals should dictate the income you choose to create. And those goals have to be based on a realistic view of how long you might live, factoring in other secure income like your state pension, and then building a diversified, total return-focused portfolio that can sustainably support that chosen income level.

SPEAKER_00:

So the big takeaway seems to be chasing high dividend yields is often a trap. It can force you into a riskier, less diversified portfolio than you need, potentially undermining your long-term security compared to just focusing on your overall total return and selling assets systematically.

SPEAKER_01:

That sums it up perfectly.

SPEAKER_00:

Which leaves us with a final thought for you, the listener. If that total return strategy is mathematically sound, potentially more efficient, and could even allow you to spend more over your lifetime, what's really stopping you from adopting it? Often it's that psychological hurdle shifting from being a saver who hates touching the capital to being a disciplined spender who strategically sells assets when the plan requires it.

SPEAKER_01:

It's a mental shift.

SPEAKER_00:

So maybe ask yourself is there some internal judgment you're making about the act of selling shares? And if you could replace that judgment with a disciplined plan, could that unlock a more secure, maybe even more abundant retirement for you? Something to think about.