How health and wealth influence your retirement decisions

What does an ideal shift into retirement look like to you? Do you envisage a hard stop from work, relying on your hard-saved pensions and investments to fund your newfound freedom?

Or does the thought of quitting the workforce leave you feeling slightly uneasy? We all need some purpose in life, and while not every working day is enjoyable, a job can bring some much-cherished fulfilment.

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You may feel strongly about either option right now, but things can change as time moves on. Although working into your 70s might seem a good idea today, after hitting state pension age (currently 66 but rising to 67 by 2028) you may decide to put your feet up. Alternatively, you could initially retire only to crave returning to work in some capacity to avoid twiddling your thumbs.

But whichever camp you’re in, the thing you really want is choice; the carte blanche to live retirement on your own terms.

The main factors that typically influence how much choice you have are health and wealth. To be more specific, the better shape both are in, the wider your retirement options.

Two new pieces of research - one joint report by the Institute for Fiscal Studies (IFS) and the abrdn Financial Fairness Trust, and another from us here at interactive investor - highlight the link between health and wealth, and the potential impact on whether your retirement plans pan out as you hope. Let’s drill down into the data.

Early retirement increasingly reserved for the wealthiest

The first thing to mention is that the cost-of-living crisis, which has been with us for the best part of two years now, has thrown a spanner in the works of many people’s retirement aspirations.

Inflation soared to 40-year highs last year and is still stubbornly sitting at 6.7%. The sharp increase in the cost of everyday goods and services is forcing workers to rethink whether they can retire at the point they intend to.

A respondent to the interactive investor Great British Retirement Survey 2023 said: “The cost of living and inflation will erode my pension pot. This has made me anxious about my retirement date. I’m concerned I will work too far into the future and not be healthy enough to enjoy my retirement.”

Even before high inflation emerged, wealth levels were playing an ever-increasing role in how early people could afford to retire. According to the report by the Institute for Fiscal Studies and the abrdn Financial Fairness Trust, two decades ago affluence had only a minor influence on when people packed up work. Of those aged 55-64 in 2002-03, 20% of the poorest fifth of society had retired compared to 28% for the wealthiest fifth.

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However, fast forward to 2018-19 and the gap had widened significantly. The research found that only 7% of the poorest fifth were retired, while for the wealthiest fifth it was 24%.

This might be explained, in part, by shifts within the pension landscape that have placed more onus on people to take control of their retirement savings. The gradual phasing out of defined benefit (DB) pensions is one element. Workers with access to such schemes can, in many cases, sleepwalk into retirement knowing a guaranteed, lifelong, inflation-linked income awaits them.

But the pivot to defined contribution (DC) pensions, where you accrue a pot of money to draw from rather than secure a future income, means savers now must actively engage with their retirement plans or run the risk of reaching later life with inadequate savings.

Health is one of biggest capsizers of retirement plans

It’s important not to overlook the close relationship between health and wealth. Studies have found affluent people live longer, healthier lives. A study published in 2020 by the Journal of Gerontology found that at age 50, the wealthiest men and women lived an extra eight to nine years in good health compared to the poorest.

It therefore stands to reason that the least wealthy are more likely to retire early due to health reasons. The IFS report found that 39% of the poorest fifth of society in 2018-19 - that were not working but not retired - reported themselves as permanently sick or disabled. This compared to only 9% of those in both the middle fifth and the wealthiest fifth.

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Elsewhere, findings from our Great British Retirement Survey highlight the impact of ill-health on early retirement. Our report uncovered that of those who said that a major life event had negatively impacted their later-life plans, illness - either their own (31%) or a loved one’s (18%) - was the biggest factor.

Keeping in good health is clearly essential if you aim to work beyond the state pension age. If you don’t have the physical or mental capacity to work then you won’t be able to, no matter your age or affluence.

But what may surprise you is that many who remain in the labour force aren’t doing it for financial reasons. In fact, our survey found that only a fifth (22%) of those aged 66 and over who are yet to retire are still working solely because they need the money.

Conversely, 38% of this group are still working due to a combination of money and enjoyment, while 32% work purely because they enjoy it.

And once again, the decision to stay in the workforce is affected by wealth. The IFS report found that among people aged 70-74, the employment rate is 15% for the richest fifth, compared to 11% for the middle fifth and 6% for the poorest fifth.

The state pension matters for the majority

Most retirees, regardless of affluence, place some reliance on the state pension to support their retirement lifestyle – although some are more reliant than others.

According to the IFS study, among those aged 66–74 who left the workforce, the state pension makes up 70% of the income for the lowest-income fifth, 45% for the middle fifth, and 20% for the highest-income fifth.

The state pension is a hot topic right now, with the triple lock’s short-term future set to be decided on 22 November at Chancellor Jeremy Hunt’s Autumn Statement. The triple lock guarantees to uprate the state pension every year by the higher of inflation, average wages or 2.5%.

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Current retirees, especially those in the lower income brackets, will hope the government keeps its word and maintains the policy for 2024-25, and upticks the state pension by 8.5% in line with average earnings.

So, does wealth equal health when it comes to retirement?

While the research suggests accruing or inheriting wealth can improve your odds of a long and healthy life, clearly there’s no guarantee. Serious illnesses do not discriminate and are often out of our control.

Even if we remain fit and healthy enough to keep working, either before or after we reach state pension age, there’s the chance a loved one could become ill or disabled. Stopping work to care for them full time might be the only option.

However, something within our control is how we engage with our retirement savings, which can make a positive difference later in life. This is underscored by the IFS research which found retirees with the highest incomes generate roughly half their income from private pensions.

An important aspect to guard against unfortunate events, such as ill-health, is to frequently keep track of where your savings are in relation to your retirement goals - ideally at least once a year.

This means that should you be forced to retire for any reason - or decide you’re wealthy enough to jack in work sooner - you’ll know where you stand, helping to ameliorate any potential financial worries.