The Cost of Living Longer - are you prepared?
Expert advice from Blevins FranksIf you're looking forward to a long and happy retirement in Portugal, now is the time to ensure your pensions, investments and savings last as long as you do. Funding your retirement requires planning, particularly as an expat retiree. Strategic, current and professional advice is vital to ensure that you can live your retirement without compromising your lifestyle.
In the article below, Dan Henderson from Blevins Franks looks at some key considerations when contemplating the cost of living longer and ensuring a financially tranquil retirement.
Blevins Franks offers integrated advice and financial services to expats living in the Algarve and the rest of Portugal, such as cross-border taxation consultation, wealth management and estate planning.
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The cost of living longer
By Dan Henderson, Partner, Blevins Franks
By making the lifestyle choice to retire in Portugal, you’ll want to make the most of what the country has to offer, hopefully well into the future. This may be longer than you expect. Thanks to medical advances over the years and a better quality of life, people are generally living longer than the previous generation.
Living to a ripe old age does sound rather appealing, provided we are healthy enough. Much more time to watch our grandchildren grow up and to enjoy a well-earned retirement. There are, however, implications at both personal and government levels, with the key issue being: can we afford it?
The longer we live, the longer we need our savings to last in order to live as comfortably as we are used to. For peace of mind, assess whether your resources are on track to last throughout your lifetime. Here are the key considerations.
Income and inflationStarting with the big topic of the moment – inflation. We are getting used to headlines about rising inflation and the levels we have seen this year are certainly an eye-opener on how it can impact our monthly living costs. But even though inflation will hopefully start to come down before too long, even low levels, compounded year after year, will reduce how far a fixed income will stretch in the future.
Say, for example, you spend €5,000 a month. Assuming an inflation rate of 3% a year, in 10 years time you could need €6,720 a month to maintain the same spending, and €9,030 in 20 years. So, your capital and income would need to grow by the same amount to maintain the same standard of living.
Making your savings and investments lastMany retirees favour low-risk, ‘safer’ investments like bank deposits in their later years. But with a potential 30 years or more to fund in retirement, this can actually be a risky strategy.
British expatriates also need to factor in exchange rate risk. If you receive income in pounds while spending euros in your daily life, depending on currency movements you may find your money does not go as far as it once did, even without the inflation factor.
By following some key investment principles and taking specialist guidance, you can invest capital to give it the opportunity to keep pace with inflation, while keeping risk to a comfortable level. Start by establishing your risk profile then carefully build a well-diversified investment portfolio to suit your circumstances, needs and objectives. Look for investment arrangements which provide some currency flexibility to try and avoid the exchange rate risk.
For example, you could get currency flexibility through a specialised form of life assurance bond that allows policyholders to hold a range of investments in a tax-efficient package.
A taxing problem – not just for governments
Rising life expectancy is also expensive for governments. The higher the proportion of older people in a population, the greater the costs of services like state pensions and healthcare – and the lower the number of taxpayers that can fund it. The solution usually lies in pension or healthcare reforms and tax increases to finance these escalating expenses. The issue has been exacerbated over recent years with the amount of money governments have had to spend as a result of covid.
Higher taxation can be a considerable threat to your financial security in retirement – just like inflation it erodes your income. This is where personalised tax planning is vital to make use of available opportunities – in Portugal, the UK, or elsewhere – to ensure you do not pay more tax than necessary.
With many of these arrangements you can combine your tax and investment planning in one exercise, allowing you to tackle the twin threats of tax and inflation at the same time.
Getting the most from your pensionsPensions are often the key to financial security in retirement, so take care to do what is right for you. You need to consider all your options, carefully weighing the pros and cons. Look at your income needs, investment options and risk, currency risk, what happens to the balance when you die, and the tax implications.
There may be ways for expatriates to make pension funds go further, but before making any decisions, take regulated advice to avoid pension scams and establish the best approach for your particular objectives and circumstances. You may be best advised to leave your pension where it is.
Leaving wealth behindIf you want to leave a lasting legacy for your family, you have to make sure you do not spend it all in your own lifetime – without compromising your quality of life today. A strategic financial planning approach – that considers estate planning alongside investing and tax planning – can prove invaluable here.
Estate planning is complex – more so for expatriates who have to consider the inheritance regime of two countries and how they interact, and navigate foreign inheritance taxes and succession laws. Portugal, for example, imposes forced heirship. If your family includes children from previous marriages, be particularly careful to ensure everyone benefits in accordance with your wishes.
Whatever your stage of life, good financial planning can help you afford the lifestyle you want, for as long as you need, so you can focus on enjoying your retirement in Portugal.
This article should not be construed as providing any personalised investment or taxation advice. You should take advice for your circumstances.
Blevins Franks Wealth Management Limited (BFWML) is authorised and regulated by the Malta Financial Services Authority, registered number C 92917. Authorised to conduct investment services under the Investment Services Act and authorised to carry out insurance intermediary activities under the Insurance Distribution Act. Where advice is provided outside of Malta via the Insurance Distribution Directive or the Markets in Financial Instruments Directive II, the applicable regulatory system differs in some respects from that of Malta. BFWML also provides taxation advice; its tax advisers are fully qualified tax specialists. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts, retirement schemes and companies. This promotion has been approved and issued by BFWML.
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