Whilst it’s tempting to ignore the latest set of changes and hope for the best, it really is vital to get a handle on what’s changed so that you can make the right choices, if you don’t, your pension fund could be eroded well before the end of your life. So what do you need to consider?
How long are you going to live?
Given that people are living a lot longer these days, a woman’s average life expectancy is 83 and a man’s 79, there is a requirement that the pension fund needs to last a lot longer than it may have preciously. It is an increasingly important question to consider, especially for retirement investors worried about the effect of inflation on their spending power.
The Government will provide a means for everyone to access ‘guidance’ in respect of the options at retirement but this should not replace the advice given by a good Financial Planner who can utilize things such as cash flow modeling tools to help you devise a financial plan in retirement.
Every day there seems to be statistics banded about in the press regarding longevity – 60 is the new 40; there are now 13,350 centurions in the UK compared to 7,740 just 10 years ago.
Advances in medicine, a quality food supply and a culture of healthy living amongst many other trends factor into our ability to outlive the hunter-gatherers of thousands of years ago. People will die earlier than they would like and people probably live a lot longer than they would like but the facts of the matter are people are living longer.
If you live to age 65, the traditional retirement age, what are your chances of living longer? The answer is extremely good. At age 65 you have a 63% chance of living until age 85 and a 42% chance of living until age 90. Added up, your retirement money at age 65 is going to have to last, potentially another 25 years!
How much money do you need to live comfortably in retirement?
Because of inflation risk, the chances of your money sticking around with you are much, much lower. Inflation has been described in the past as the silent assassin and here’s why.
Let’s say you retired at age 65 in 1990, exactly 24 years ago. Nelson Mandela has just been released, Iraq has invaded Kuwait, John Major has replaced Margaret Thatcher and the kids are not permanently in their bedroom on Facebook because the internet doesn’t really exist.
You have saved up £300,000 for your retirement and need the money to last for the rest of your life. For that money to keep pace with inflation, it would need to grow to £651,570 today, never mind any withdrawals that are necessary in the meantime. In other terms, anything that cost you £1 in 1990 costs £2.17 today. The values of everything, notably housing and fuel, have risen and fallen over those intervening years, but that’s the aggregate of all costs.
Now imagine yourself retiring today at 65. Is £300,000 a reasonable target? If you assume that you’ll live another 20 years, expect your purchasing power to drop by half as the prices will double. Again, this is irrespective of any spending you do and assumes “normal” historical inflation on average.
Can you work out the figures?
There are plenty of fancy calculators online to help you estimate a safe retirement withdrawal rate but the bottom line is that your investments are going to need some risk exposure to ensure inflation adjusted returns.
It is important to gain independent financial advice to discuss all of the risks and all of your options. Many Financial Planners have access to cash flow modeling tools that provide a valuable resource to help understand the impact of how your portfolio copes with varying levels of expenditure.
The new pension rules allow a great deal more flexibility but also requires a degree of control. Seek advice before rushing in to any decisions, go armed with as many questions as you can and make sure you have some clear objectives that you want to achieve before you ask for professional advice.
Image: Pension via Shutterstock