Assuming you’ll retire healthy is an expensive mistake

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After a busy working life, it’s only natural to look forward to health, wealth, and happiness in retirement.

Unfortunately, the latest research suggests that the vast majority of us will not reach this milestone if all three of these criteria are present. According to the think tank Institute for Public Policy Research, only 16% of women born today will survive in good health. Only 9% of men will do the same.

Healthy life expectancy can differ greatly from normal life expectancy, although there is clearly a strong correlation. In addition, healthy life expectancy has been increasing at a slower rate – the average British woman can expect to spend her entire last decade in ill health.

Your chances are better if you are wealthy and your job involves less physical wear and tear. Still, the overwhelming majority of people will be able to cope with a number of serious health problems by the time they reach retirement age.

This has obvious welfare issues, but the financial pressures can be just as onerous.

Sudden early retirement for health reasons has a lot to do with being laid off at 50 and not being able to find decent employment. Your ability to build an adequate retirement fund is compromised just as you realize you’ll have to tap into your savings sooner than expected.

The obvious takeaway is this: don’t count on being able to supplement your savings later in your career. However, there are a number of practical steps you can take to prepare for such a nasty event.

You could ensure that arrangements are made for your own care and the care of your loved ones before they are needed. Many ailments are associated with a deterioration in mental performance and can ultimately lead to an inability to make decisions. In such circumstances, it is important that you have Permanent Powers of Attorney (known as LPAs). These enable a nominated person to act legally on your behalf when you are unable to do so yourself.

LPAs take two forms: one deals with your health and well-being, the other with property and financial matters. The latter could, for example, allow your nominated attorney to rent out your home to cover housing assistance fees.

An alternative strategy is to have an attorney buy an annuity for immediate needs. This provides a regular income to pay for inpatient care at a flat rate. Depending on the person’s age, this can cost upwards of £250,000 (US$300,000). The income from such an annuity may be tax-free if paid directly to the provider. Note, however, that the latter strategy could prove extremely costly as the revenue stream ends when the patient dies if care is only required for a few months.

Wills should also be updated regularly, especially if you have children. Earlier versions may contain information about who should look after you in the event of your untimely death. However, later designs could include adult children acting as your executors or providing them with the financial means to care for a vulnerable relative.

Impaired life expectancies have a (very) faint bright spot financially. Insurance companies in the UK offer significantly better pension rates for people with health problems. Although it’s less common these days, some people buy a lump sum annuity to give them a guaranteed income for life. If your health is compromised, the income you could buy with an annuity could be much more than if you were in good health.

If you’ve had a stroke or heart attack, your retirement income can easily be 75% higher than that of a healthy person. Even if you regularly smoke, drink or have a high body mass index, you can increase your retirement income. An estimated 60% of those eligible to purchase annuities are eligible for some form of increased interest rate.

Fixed income is experiencing something of a renaissance because its returns are also heavily dependent on long-term market interest rates, which have risen sharply this year.

The disadvantage of buying an annuity is that your heirs will inherit less than they would otherwise have. Because of this, few financial advisors will recommend buying when end-of-life is imminent.

Illness also affects how you manage your retirement savings. As a general rule, anything that impacts your earning potential should cause you to become more conservative with your investments. The most powerful tool for saving for retirement is the commitment and the ability to keep working if your savings aren’t enough for retirement. If your ability to work is reduced or completely eliminated, this must be reflected in your willingness to take risks with your existing savings.

The low probability of reaching retirement age in good health raises another question. Should you retire early to avoid this problem in the first place? The data on this is surprisingly ambiguous. Some studies have allegedly shown that early retirement not only increases overall life expectancy, but can also increase healthy life expectancy. But a famous study suggests just the opposite – that working longer leads to a longer life expectancy. There is no clear answer to this question.

What is clear, however, is that financial worries can be compounded by boredom and dissatisfaction, which can lead to post-retirement depression. This is another reason why people should prepare themselves mentally and financially for retirement earlier than expected.

On a more positive note, if you find your job stressful and you have made adequate financial provisions, early retirement may well be a healthy option. After all, there are no prizes for being the richest person in the graveyard.

More from the Bloomberg Opinion:

• Pension spending is too hard to predict: Teresa Ghilarducci

• Spotting recessions is more art than science: Stephen Mihm

• Sweating when afraid of chills: Andreas Kluth

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Stuart Trow is the co-host of “Money, Money, Money” on Switch Radio and the author of “The Bluffer’s Guide to Economics”. He was previously a strategist at the European Bank for Reconstruction and Development.

For more stories like this, visit bloomberg.com/opinion

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