Empty coffers….

longer retirement with no guaranteed income means that different choices need to be made, and potentially just sitting in cash could end up being more risky than investing in equities!

Fifty years ago many people worked, retired at 65 and died soon after! Bleak, but true.

Now things are different; people retiring today at 65 are more likely to live into their eighties.

This means the whole retirement pattern is changing, with people continuing to work well past the ‘normal’ retirement age either in a full or part time capacity. Without the luxury of guaranteed pensions, it means that any funds set aside to provide an income must last longer.

In the last blog we explored the dangers of relying on cash to provide income in retirement, and highlighted the need to explore different options. In this blog we expand further.

Financial plans

Whether someone pays for advice or opts to make a plan themselves, it is becoming increasingly clear that having a financial plan both pre and post retirement is vital.

The financial plan pre-retirement enables the investor to focus on what they want, and the best way to achieve this:

  1. What level of income do they need?
  2. What is the most tax efficient way to provide that income?
  3. How to build the assets to provide that income?

This is not exhaustive but is a starting point.

In retirement the biggest challenge is how to ensure the assets last so that they can provide income for as long as is needed.

Empty coffers

In the last blog we explored cash, because for many this is the asset class of choice to provide income.

As an example, assuming someone had £100,000 in an ISA savings account and took £5,000 a year from age 65. If the interest was 1.7%, the fund would be exhausted by their 89th birthday. This seems good.

However, if they want to increase the income each year to keep pace with inflation (and assuming 2% inflation) then the money would run out by their 84th birthday.

If different variables are built in then the result changes. Assuming that this is the only source of capital and they want to buy a car for £10,000 when they are 70, then the money would run out by their 82nd and 86th birthday respectively.

This highlights the risk that as we live longer and more people live into their 90s, it increases the chances of using up all of our capital (and income) through poor investment choices.

Ironically if we go up the ‘risk scale’ and invest in equities, we have a better chance of making the capital and income last longer. If we take a period where inflation was 8.7% but the average return was 11.1% (assuming a £10,000 withdrawal at age 70 and inflation increases) the fund would last until age 91 (nearly 10 years more).

Therefore longer retirement with no guaranteed income means that different choices need to be made, and potentially just sitting in cash could end up being more risky than investing in equities!

Conclusion

One of the greatest fears for people in retirement is that their funds will run out. Cash seems to reduce that but the reality is that because saving rates are so poor now, it actually increases the risk of money running out because little or no interest is paid.

Equities can increase the risk but have proven over time to deliver more sustainable returns which have the potential to increase the length of time for which assets can last. Whilst not guaranteed and return can go down or up, careful management of the funds and income withdrawals could potentially stretch out how long the money lasts.

However, to achieve this funds must be managed in retirement to get the best income in the most tax efficient way and ensure this is sustainable. We would argue that most people don’t want this pressure in retirement, hence the need for a financial planner. But for those who don’t want to use such services should not ignore it either because they could potentially be left with empty coffers.

USEFUL TOOLS

Decumulation Spreadsheet

This free tool enables you to estimate how long your funds could last in retirement based on the estimated growth you expect and income you wish to receive. Download decumulation calculator

Cash Flow Modelling

This free tool enables you to estimate how much you need in retirement and how much you need to save to achieve that income. Download cash flow modelling calculator

NOTE: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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