Longer life expectancies mean most of us will live to at least our mid-80s with many living to age 100; one of the most well-publicised impacts of this is the increased cost of pension provision. This is one reason why annuities now offer poor value for money, leading to more retirees opting for a flexible drawdown retirement, which of course creates other challenges and potential risks to be aware of.
Some experts warn that £1 million in retirement savings may not be sufficient, therefore it’s understandable if you’re left wondering: will I have enough to retire? Whether your pension pot is £1 million, £250,000, more or less, you will need a smart strategy of how to spend your money so that you don’t outlive your savings.
Whilst longevity risk can be managed to a certain degree by setting and regularly reviewing the underlying investments, asset allocation and the level of income withdrawn annually from the pension, there are important considerations that you and your adviser should be discussing:
The impact of excessive withdrawals too early in retirement
Drawing heavily on your pension funds in the early years of retirement will come at the cost of having a less income available in later years. For many this is a suitable strategy, as typically we need less income as we move into older age. However, there can be unexpected costs in later life should ill health and/or long term care become an issue. When developing your individual withdrawal plan you should be consider your long term income needs and understand the potential consequences.
How long will I and my partner live for?
Very few of us know when our own expiry date is, though the Office of National Statistics report that at the age of 55 a male life has 1 in 4 chance of living to 92 male and 94 for females. This tells us that there is now little difference between male and female life expectancies. If your spouse or partner is significantly younger than you, you will have to take into account that as a couple, your funds will need to sustain a regular income need for a longer period.
You can check your own life expectancy by clicking here.
How will withdrawals in a falling market impact my fund?
From an investment perspective, it is not always possible to optimise the timing of your income payments and should you withdraw during a market downturn, you are unlikely to regain any losses. A sensible strategy is to have holdings in short, medium and long term assets which typically reduces the impact of withdrawals on the value of your fund. Your Wealth Manager can help agree a suitable amount of cash to be held, ensuring that you have easily accessible funds and mitigating the need disinvest at an inappropriate time.
What is a sustainable withdrawal rate and how often should I review it?
This is dependent on the individual and can vary widely – there is no one size fits all approach. It is important to discuss with your Wealth Manager what your needs are likely to be throughout your retirement and review your circumstances regularly. Whilst it is common for core/basic costs remain constant, it is inevitable that your lifestyle and discretionary spending will change as you move through the course of your retirement. Stress testing the sustainability of your expected needs, taking into account the value and performance of your invested funds is a conversation you will have with your Wealth Manager regularly. You can also complete your own cashflow analysis using the Tideway drawdown calculator.
How can I ensure that my fund keeps pace with inflation and retain its value?
Having a suitable asset mix and not being overweighted in cash will generally combat the effects of inflation over the long term. Historically, lower risk investments such as Fixed Interest assets can also suffer when inflation is rising, therefore it is important that your portfolio includes asset backed investments, such as equities or alternative investments (eg infrastructure) to mitigate inflationary pressures.
How to accommodate unplanned withdrawals?
Any unplanned capital needs should be considered carefully before disinvesting, including any taxation consequences. For example, a useful strategy to address an income tax bill is to straddle a withdrawal across two (or more) tax years, as this could avoid pushing an individual into higher income tax bracket. Where an individual holds multiple investment wrappers i.e Pensions, ISAs and General Investment Accounts, careful consideration should be given as to which wrapper is the most appropriate source to meet capital requirements.
Careful financial planning can make a significant difference to your financial well-being. Our goal is to give you the confidence to make informed decisions, by offering financial analysis and solutions which take into account your specific needs and desired lifestyle in retirement. We are able to illustrate the impact of any changes made to your portfolio and how this could affect your wealth over time, whether your retirement plan is 20, 30 or even 40 years in length.
- The content of this document is for information purposes only and should not be construed as financial advice
- Please be aware that the value of investments, and the income you may receive from them, cannot be guaranteed and may fall as well as rise
- We always recommend that you seek professional regulated financial advice before investing