Retirement can last a long time.
Average life expectancy for a 60 year old man is 26 years, but there is a 1 in 4 chance that a 60 year old will live until 94 (according to the Office for National Statistics).
And once you have retired, it is pretty difficult to go back to work. The prospect of 34 years of making ends meet is not very appealing!
It seems pretty hard to imagine how your life might change over the next 30 years or so. Think back to 1992 – I imagine that your world was quite different then (mine was!).
Fortunately, money is reasonably predictable and today’s retirees can benefit from recent academic research into spending in retirement and the behaviour of retirement investments.
There are some key risks in retirement, which you should consider as part of your plans for retirement, in addition to the usual investment risks we know about. The most important examples are:
• Under-estimating your expenditure. It’s easy to forget some items of expenditure, particularly those which don’t come up too frequently – most people will still want to change their car and replace the bathroom in their house in retirement, but few people will include these items in their plans.
And often, people don’t include the “trivial” items, which give them real pleasure (in our house, bike parts, shoes and wine) in their retirement expenditure plans. If you are to enjoy a successful retirement, you will need to have worked out how you are going to pay for care, if, indeed, you need it.
• Inflation. Whilst it isn’t the problem it used to be, inflation can slowly destroy the spending power of the Pound in your pocket. In 30 years time, you’ll need £210 to buy the same things you can buy today for £100, if inflation is just 2.5% per year. Inflation is not the same for all goods, and over the last ten years or so, the cost of the items pensioners spend their money on has gone up faster than average.
• Taxation. Over the last decade, the taxman has been kind to pensioners, and it would be easy to conclude that tax increases are not significant for pensioners. But a simple reversal of some of the tax breaks like the 0% starting rate for savings could spoil a retirement which depended on its retention.
• Retirement Specific Investment Risks. Investment portfolios which are being used to fund retirement spending additional risks to those which are being used to build up funds. Money is withdrawn regularly from your retirement portfolio and you won’t have the option to save more or retire later, if the investment markets don’t deliver for you.
Long life magnifies all of these risks. The longer you live, the more likely it is that risk will become reality.
It is essential to make the most of all of the resources available to provide for your retirement.
Make sure you factor in your state pension, and the guaranteed income you will receive from old company pension schemes. If you own a property which you let out, you may not want to manage it until the day you die, so you need to work out what the effect of selling or employing an agent to manage it might be.
Recent academic research has demonstrated how much you can safely withdraw from an investment portfolio, without running the risk of exhausting the fund.
The research shows that the amount you can withdraw safely varies, depending on whether the portfolio is funding essential or discretionary expenditure, whether asset values are high or low, your investment approach, and the amount you pay in charges.
We all know that as we age, our willingness and ability to process complex data declines; regulators see this decline in cognitive power as one of the key retirement risks. So, it’s essential to have a written plan to which you can return, to have somebody who can remind you of the key parts of it and to help you implement it.
So, you need a plan to make sure that you have enough to income and capital to cover your spending for thirty years or so and to ensure that you can deal with all the risks that arise.
Failing to plan is planning to fail, and you may have thirty years to think about what might have been.
