One of the most common financial concerns we encounter is: “I’m scared of running out of money in retirement”.
With people living longer than ever, and the cost of later-life care spiralling, it’s a genuine concern for many people approaching or at retirement, or those who have retired already.
While there is no hard and fast rule for running out of money, there are some steps you can take to make sure you have ‘enough’. Here are three great tips.
1. Save enough
Obviously, the first way that you can make sure you don’t run out of money in retirement is to make sure your pension fund and other assets are sufficient for your needs. This means that you need to be saving enough during your working life.
In 2017, the BBC undertook some research to determine how much you needed to save to retire on a pension of £20,000 a year.
The table shows how much money you would have to contribute every month to get an eventual pension of £20,000 a year, depending on the age you start saving.
For example, if you started saving at the age of 25 you would need to put away £246 a month, net of tax. After 20% tax relief, that sum is actually worth £307.
If you started saving at age 35 you’d need to put away £404 per month, while if you left it until age 45 to start saving, you’d need to pay in £826 as a man and £861 as a woman.
Of course, if you wanted to retire early, or on an income of more than £20,000 a year, you’d need to save even more.
The calculations are based on a complex model that predicts the investment return over the lifetime of the pension. Assuming it achieves investment growth of a typical default investment strategy, and assuming the eventual payout increases annually with inflation, as well as granting a 50% income to a surviving partner, this level of saving has a 50/50 chance of providing an annual income of £20,000 or more.
2. Make sure your withdrawals are sustainable
The second way to avoid running out of money in retirement is to make sure you’re not depleting your pension fund too quickly.
Since the 1990s, many retirees have been following the ‘golden rule’ of not withdrawing any more than 4% from their pension pot each year. This rule was based on a study that suggested an initial withdrawal of $40,000 from a $1,000,000 portfolio invested in 50% US equities and 50% US intermediate bonds, and then annual 4% withdrawals, would have seen the fund last for 30 years, even in the worst-case scenario.
This ‘4% rule’ has been a useful guide for many years and can explain why retirees withdrawing more than 4% per annum are at risk of running out of money. FCA retirement income data has shown that 40% of withdrawals were at an annual rate of 8% or more.
However, recent research from pensions consultancy LCP has found that even taking just 4% could lead you to deplete your fund in retirement.
Dan Mikulskis, the author of the report, says that ‘3% is the new 4%’ because pension pots are no longer growing as quickly every year as when interest rates were higher.
Note that even withdrawing 3% of your pension fund a year might not ensure you have sufficient money in retirement. This is because:
- Your portfolio will be different to the one used to establish the 3% rate. The mix between equities, bonds, and other asset classes makes a difference to how sustainable your withdrawals are
- You may have longer or shorter timescales than the 30 years used in the initial research
- You have to consider the investment fees and taxes you’ll pay.
When it comes to drawing your income, there are lots of reasons why it can pay to take advice from a financial planner. This brings us to…
3. Speak to a professional before drawing your income
Since Pension Freedoms were introduced in 2015, retirees have been faced with a wide choice of options. Of course, with greater choice comes greater complexity, and the consequences of getting decisions wrong can be profound. Making the wrong choice could see you end up paying too much tax or running out of money in later life.
Despite this, a 2019 survey found that more than half (51%) of over 65s had never taken any financial advice, with 57% saying this was because they could do it on their own.
A further study by financial analysts Moneyfacts found that clients who drawdown their pension savings without first taking professional financial advice are three times more likely to run out of money than those people who work with a financial planner.
Moneyfacts head of pensions Richard Eagling says: “Drawdown has many appealing qualities for those seeking to maximise flexibility in their retirement planning but one of the key trade-offs is that individuals have to take on longevity risk for themselves.
“The fact that those individuals going it alone with their drawdown strategies are almost three times more likely to have depleted their fund compared with those taking professional advice should be a red flag moment.”
If you’re approaching retirement with a significant pension fund and other assets, working with a financial planner can add huge value. They can structure your retirement income in a way that is sustainable, while maximising tax efficiencies and any legacy you would like to leave.
Get in touch
If you’re approaching or at retirement, and you want to ensure you don’t run out of money, please get in touch. Email firstname.lastname@example.org or call us on 01454 416653.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.