Assuming you’ll retire healthy is a costly mistake

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After a life of hard work, it is natural to hope for health, wealth and happiness in retirement.

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

Healthy life expectancy can be very different from ordinary life expectancy, although there is clearly a strong correlation. Additionally, healthy life expectancy has increased more slowly – the average British woman can expect to live her entire last decade in poor health.

Your chances are better if you are wealthy and your job involves less physical wear and tear. Nevertheless, the overwhelming majority of people will face a number of serious health issues by the time they reach retirement age.

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

Sudden health-related early retirement has a lot in common with being made redundant in your 50s and unable to find a corresponding job. Your ability to build an adequate retirement fund is compromised just when you find out you’re going to have to dip into your savings sooner than expected.

The obvious conclusion is this: don’t count on the possibility of consolidating your savings later in your career. However, there are a number of practical steps you can take to prepare for such an unpleasant eventuality.

You could ensure that arrangements for your own care and that of any dependents are in place before they are needed. Many ailments involve a deterioration in mental capacity and can ultimately lead to an inability to make decisions for yourself. In such circumstances, it is essential that you have durable powers of attorney (known as LPAs) in place. These allow a designated person to legally act on your behalf if you are unable to do so yourself.

APLs 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 appointed lawyer to rent your house to cover residential care costs.

Another strategy is for a lawyer to purchase an annuity for immediate needs. This provides regular income to pay for residential care in exchange for a lump sum. Depending on the age of the person, it can cost upwards of 250,000 pounds ($300,000). Income from such an annuity may be tax exempt if paid directly to the caregiver. Note, however, that since the revenue stream ends when the patient dies, this latter strategy could prove extremely costly if care is only required for a few months.

Wills should also be regularly updated, especially if you have children. Early drafts may include details of who should care for them in the event of an untimely death. Later projects, however, could involve adult children acting as your executors or providing them with the financial means to care for a vulnerable relative.

Altered life expectations have a (very) weak silver lining financially. Insurance companies in the UK offer significantly better annuity rates for people with medical conditions. Although less common these days, some people purchase an annuity with a lump sum annuity to provide guaranteed income for life. If your health has been compromised, the income you could buy with an annuity could be much higher than if you were in good health.

If you suffered a stroke or heart attack, your pension income could easily be 75% higher than that of a healthy person. Even being a regular smoker or drinker or having a high body mass index can increase your pension income. An estimated 60% of people eligible to buy annuities are eligible for some sort of enhanced rate.

Annuities are enjoying something of a renaissance, as the income they pay out is also highly dependent on long-term market interest rates, which have risen sharply this year.

The downside of buying an annuity is that your heirs will inherit less than they might have otherwise. For this reason, few financial advisors will recommend buying one if end of life is imminent.

Poor health also affects how you manage your retirement savings. As a general rule, anything that impacts your earning power should cause you to become more careful with your investments. The most powerful retirement planning tool is to be employed and have the flexibility to continue working if your savings are insufficient for retirement. If your earning capacity is reduced or completely eliminated, this should be reflected in the level of risk you are willing to take 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 is surprisingly ambiguous on this point. Some studies have claimed to show that early retirement not only increases overall life expectancy, but can also increase healthy life expectancy. But a famous study suggested the exact opposite: working longer leads to a longer life expectancy. There is no straight answer to this question.

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

More positively, if you find your job stressful and have made adequate financial arrangements, early retirement might indeed be the healthier option. There is, after all, no prize for being the richest person in the graveyard.

More from Bloomberg Opinion:

• Retirement expenses are too difficult to predict: Teresa Ghilarducci

• Identifying recessions is more art than science: Stephen Mihm

• Sweating for fear of shivering: Andreas Kluth

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

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

More stories like this are available at bloomberg.com/opinion

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