A new study has revealed a shockingly common mistake people make about their retirement - which could mean they spend their entire pension pot well before they die. Apparently when asked to estimate how long their retirement will be, the average answer people give is 17 years. In reality, two thirds of people will live for 20 years or longer.
The study, by Partnership and Retirement Intelligence, spoke to a range of people over the age of 18. They found that the most common answer people gave when asked to guess the length of their retirement, was between 16 and 20 years. However, by far the most common reality is that people will spend more than 30 years in retirement.
People were more likely to think they have five years or fewer in retirement than to think they have 30 years or longer. However, the statistics found that 30% will spend 30 years or longer in retirement, while fewer than 5% will have five years or fewer.
The problem lies in how we estimate this sort of thing. When asked to consider the length of their retirement, people are trying to work out when they are going to die. To do so, they will consider their closest family member to have died - and assume that they will die at roughly the same age.
Now that pension freedoms have been introduced, this can have potentially disastrous results. If people opt not to take an income for life, and instead to try to spread their savings over their lifetime, there's a very real risk that they will run short as they get older - and exceed the age at which they expected to die.
The experts at Partnership and Retirement Intelligence, point out that not knowing exactly how long your retirement will last should make us consider carefully when we are choosing what to do with our pension pot. They have produced a retirement guide, 'Converting Your Pension Pot into Income – How to Combine Guaranteed Income and Income Flexibility', and highlight how income drawdown offers flexibility, annuities offer guarantees, and a combination of them both can provide a useful middle way.
Billy Burrows, of Retirement Intelligence, said: "There is a strong case for both annuities and drawdown in the right circumstances but for most people choosing a combination of the two will provide them with the security and access to cash that they aspire to. Indeed, choosing to add a guaranteed income for life to their portfolio means that they are safeguarding themselves against living longer than anticipated which while often desirable can mean that people face significant financial hardship in late old age."