PROVIDED we are of sound health and mind, most of us would relish the prospect of a long, financially-sound life.
Thanks to advances in science and medicine, the possibility of us having 30 years or so in retirement is increasing. A 65-year-old healthy man has a 50% chance of living to 87, and a 25% chance of reaching 92. A 65-year-old healthy woman has a 50% chance of living to 90 and a 25% chance of reaching 96. It will become more common for people to live a further 35-40 years once they have retired.
As life expectancy increases, so does the time we need savings and investments to last and provide income. The longer you live, the further money will need to stretch and the higher the chance of it expiring before you do.
This risk should not be underestimated. The last thing anyone wants is to be worried about money and have to reduce comforts and items like private healthcare or even run out of savings completely in their later years.
Your financial planning needs to take into account the possibility of you living longer than you may have expected. It also needs to take inflation into account - perhaps the biggest financial threat for retired people.
If, for example, you typically spend about €5,000 a month nowadays, in ten year’s time you could need around €7,000 a month to maintain the same spending and in 20 years over €10,000.
Inflation is low, but most commentators believe it is set to rise to very high levels as a result of economic stimulus measures around the globe. In any case, even modest rates of inflation are damaging over the long-term.
It is traditional for people approaching retirement to move capital out of equities and into cash and gilts. However, when you take the possibility of living 30 years in retirement into account, this is no longer sound judgement.
Your capital needs to earn enough capital growth to keep pace with inflation, and cash in the bank does not provide this.
Your portfolio will need to include a mix of “real assets” (equities, bonds, property) as well as cash. Your financial adviser should recommend a bespoke strategy based on your personal objectives, tolerance to risk and circumstances.
Longevity will also add to the already high burden on the state. The elderly tend to need more health care than younger people, so the more elderly people there are, the higher the health bill for the government, not to mention other social services. What is more, governments rely on taxes to fund their costs.
When people did not live as long, there were more people in work than in retirement. Taxes were largely collected from the working population, who pay both income tax and national insurance.
Today, with less people in work and more in retirement, there is much less tax coming in to support social services for retired people.
One solution would be to increase taxation. There are already steps towards this. In the UK tax rises are scheduled for high earners and the middle classes are also bracing themselves.
Here in France the government has so far insisted it will not hike taxes, but with its large public deficit, who knows what will happen?
In the EU, the withholding tax applied under the terms of the Savings Tax Directive launched at 15% in 2005.
This tax (levied on certain kinds of income arising from savings or investments held in another EU country) was increased to 20% last summer and will jump to 35% in July 2011 - 133% higher than the starting rate.
The directive is under review to bring more people into its remit.
However, governments are unlikely to increase income tax to 60% or 70% as needed to cover their costs, even once the economy improves.
Three other options are to:
- Further increase efforts to prevent tax evasion and collect previously unpaid taxes
- Change the healthcare system so that people have to contribute a larger amount to their costs
- Make retired people contribute more to the national coffers than they currently do
While we will have to see how things pan out, it is possible that we will see all three introduced in one way or another.
Of course, options two and three would impact significantly on retired people, further reducing their capital on top of the inflation effects mentioned earlier.
It therefore makes sense for retirees to set up their financial planning to shelter as much of their income from taxation as possible, making sure all methods used are fully legitimate.
There are arrangements available to expatriates in France which will provide significant tax mitigation within a legitimate framework.
Reducing the amount of tax you have to pay will make your money go further and help combat the effects of inflation.
The investment opportunities available within these “tax wrappers” will help you structure your finances with the aim of keeping pace with inflation - thereby allowing you to combine the various aspects of your financial planning in one exercise.
As always, it is essential that you ensure that any financial decisions you make are fully in line with your personal situation and objectives, and that you seek advice from an authorised and professional wealth management firm to help you get your affairs in order and ensure that you get your tax planning right from the outset.
