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To retire or not to retire? That is the question! But before you access your retirement savings, you need informed confidence that your money isn’t going to run out. John Corbyn, FPFS, Quilter Retirement Specialist, looks at seven key factors which could affect how long your pension income lasts.
The UK's state pension age has been on the rise, with most people now needing to wait until they are 66 or 67. But even if you can claim your state pension, this doesn’t necessarily mean you need to immediately access your private pension. Working even a few years more can have a notable impact on your retirement pot's potential growth and the kind of income you can expect to receive.
This will also have a huge impact on when you should start your retirement. For example, if you have dreams of travelling the world, you might need more money than if you are content with a quiet life at home.
It's essential to have a realistic projection of your monthly and yearly expenses, including contingencies for unexpected costs. A financial adviser can produce a cashflow model for you that looks at your holistic finances, taking into account any income from different sources that may start at different times, and possible inheritances. This can show you how much you can expect to have, what kind of retirement lifestyle it will buy you, and how much you can potentially leave to loved ones.
While it's hard to predict, the state of the economy when you retire can affect your pension's buying power. Inflation, interest rates, and market conditions all play a part. If you're retiring in a period of economic downturn, it may be wise to be more conservative with your pension withdrawals, at least initially. You should also regularly adjust your cashflow model with help from your adviser.
The ‘4% rule’ suggests that if you withdraw 4% of your pension pot in the first year and adjust this amount for inflation annually, your savings are expected to last for 30 years. However, this assumes your spending is linear, whereas the reality is your spending is likely to alter as you age. Typically, your expenditure is high in early retirement, then reduces as you age, then potentially increases if a nursing home is required for later life. A financial adviser can help you ensure your health, outgoings, attitude to investment risk, and ability to withstand financial losses are built into these assumptions as you progress through retirement.
If you have other savings like cash or ISAs, it might be sensible to potentially use these before accessing your pension. This is because pension savings can continue to grow in a tax-favoured environment so could provide potentially more income in the later stages of retirement. Pension savings are also not typically exposed to inheritance tax. This strategy could help maximise your total savings over time, but it is important to make informed decisions, which is where advice can help to achieve all your objectives against an ever-moving backdrop of the economy.
To make a budget, start by listing all your potential income sources in retirement including your state pension, personal or workplace pensions, annuities, and any other regular income. Note down the age at which you will start receiving these incomes and their frequency (monthly, quarterly, etc.). Then consider the impact that essential expenses and recreational expenditure, such as holidays and meals out etc will have on your disposal income. You should also consider potential inheritances you may receive or want to leave to your loved ones.
The cost of living typically increases over time so it’s important to take this into account. You may wish to consider life changes such as moving to a smaller home, buying a new car, or significant healthcare expenses, all of which an adviser could steer you through.
Keeping your money invested during retirement could allow it to continue to grow. This could potentially give you a more comfortable or extended retirement. However, all investment strategies have an element of risk where you may not get back what you invested so it is important that your investment strategy is corresponds to your tolerance for investment risk, capacity for loss, your financial goals, and your individual circumstances. Financial advice can help you find a balance between enjoying your retirement, and having enough money to last – not only for yourself, but potentially for your spouse and children.
Everyone’s circumstances are different. It's crucial to continuously review and adjust your income based on your actual investment returns, your spending needs, and the broader economic landscape to make informed decisions. A financial adviser can help you create an income strategy that is bespoke to your requirements and keep an eye on it to minimise the chance of any unexpected shocks.
