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The idea of living off your savings in retirement can feel intimidating. Throughout your adult life, you have likely relied on a salary to fund your lifestyle. There was always the chance of getting a new job if things went wrong, but in retirement what do you do if you run out of money? Whilst there is no iron-clad “rule” to protect your savings, there are sound principles which you can follow to keep your pension sustainable – possibly even leaving some wealth to eventually pass down to your loved ones. Below, our financial planners at Cedar House offer three ideas to help retirees avoid running out of money. We hope this is helpful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
#1 Commit to a long-term savings plan
The longer you have to save for retirement, the more time you have for compound interest to work in your favour. Imagine, for instance, that you contributed £200 per month to your pension and it averaged a 6% return each year. After 20 years, you might have £90,713.27 saved (of which, nearly half – £42,713.27 – could be interest). After 30 years, however, the figure might stand closer to £194,957.49, with £122,957.49 comprising interest. This is why it is to important to start saving early in your career and to avoid halting your pension contributions, if possible.
Achieving strong wealth growth, however, requires choosing assets for your portfolio which offer strong potential returns. Simply saving £200 in cash every month over 30 years, for example, is almost certainly going to inhibit your returns. The interest rates you achieve may not even beat inflation, which could lead to a real-terms loss over time. Here, a financial planner can help you choose the right assets for your financial goals, investment horizon and risk appetite. They can also assist with determining how much you need to save each month, and for how long.
#2 Establish different income streams
You can minimise your chances of running out of money in retirement by putting your eggs in different baskets regarding your income. The State Pension, for instance, is typically a crucial “pillar” in a retirement plan in 2022-23, providing up to £185.15 per week (£9,627.60 per year, although this can be extended further by delaying claiming the State Pension). The State Pension provides a rising income each tax year via the “triple lock” system, and your income cannot “run out” as long as you are alive. This can help to provide a solid “base” to help pay for essetials in retirement.
Another option is using some of your pension savings to buy an annuity. These products offer a stable retirement income which can also last until your death and rise each year (e.g. at a set rate or with inflation). Annuity rates have been admittedly low for many years, but in 2022 rates are at their highest in 14 years following successive interest rate rises by the Bank of England. Those with a final salary pension (or “defined benefit” pension) can also have an advantage over those without, since these schemes offer a guaranteed retirement income from a former employer. These pensions are often available to public sector workers – e.g. teachers and police officers – and are typically worth holding onto (unless your financial adviser agrees that there are strong reasons to transfer out, such as to allow beneficiaries to inherit your pension).
#3 Commit to sustainable withdrawals
If you take too much out of your pension fund too quickly, there is a danger that it will not last as long as it should. Here, financial planners often talk about a “safe withdrawal rate” which can help guide retirees on how much can be taken out of a pension sustainably. In the US, this has traditionally been defined at 4%, although this is now likely lower in 2022 due to higher inflation. In the UK, the figure for many has been closer to 3.1%, but higher living costs are also putting pressure on this average safe withdrawal rate. The sums involved here are very personal to each individual and require careful analysis in light of their desired lifestyle, pension savings and performance, potential lifespan and prevailing economic conditions. Seeking professional advice can help you err on the side of caution regarding your withdrawals.
For some in retirement, there may still be the option of picking up some part-time work to help tide over their finances during harder economic times. In 2022, almost 1.5m over-65s are choosing this option as they fight rising energy bills another other inflationary pressures. This may be a suitable option for certain people, but returning to work carries important emotional and tax implications that need to be carefully thought through beforehand. The Money Purchase Annual Allowance (MPAA) rules, in particular, have been known to catch people off-guard in this respect. Speak with a financial adviser if you are considering this option.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk