Strategic Insights | Funding your retirement

Strategic Insights | Funding your retirement

Financial Planning
Published October 21, 2021

Retire from work – not from life

Retirement is the only period in life when time no longer equals money.
Up to a third of our lives are spent trying to find something to do with all the time we have rushed through life trying to save. And ensuring that we are comfortable and secure during those years requires some measure of care and forethought.
For many people, once they hit 40 or 50, they start thinking about the after-party. This involves giving more thought to what they might do once their careers are no longer the key focus of their lives. Inevitably, travel is high up on the list, as is engaging in hobbies and worthwhile causes. Many people simply want to spend more time with their families.
But open the papers and you will read about energy price increases, inflation and the rising cost of living more generally. Is the idea of a financially comfortable retirement increasingly far-fetched? You’ve spent decades putting money into pension pots. And you’ve become accustomed to a certain standard of living. By the time retirement starts to come into focus, the question at the forefront of people’s minds is “How much of my savings can I spend annually without outliving my money or losing my buying power relative to inflation”.

Will what you have saved provide you with the income you need?

If this is a question that keeps you awake at night, now might be the time to check in with us and review your current circumstances. It is never too late to make any minor alterations and make sure that you are on track. When you begin your career in your 20s, retirement is probably the furthest thing from your mind. Then when you are in your 30s, 40s and even 50s, there is always something else for which you could be saving other than retirement.
Financial adviser William Bengen famously reconstructed annual investment results from periods such as the Great Depression, World War II and the inflation-riddled 1970s and came up with a maximum safe withdrawal rate of 4%. He has tweaked it a little over the years, but he has essentially demonstrated that if you spend 4.5% of your assets in your first year of retirement and then increase that annual amount every year by the rate of inflation, then your money should last you at least 30 years – all other things being equal.
Implementing this method requires a certain amount of portfolio rebalancing and is not without its challenges. That rebalancing is definitely something with which Investment Quorum can help.
But before we even go down that route, here are a few things that you should start considering – as early as possible.

How much do you think you will need in retirement?

No two people have the same idea of what constitutes an ideal retirement. So everybody has different spending needs. Start by reviewing your current monthly outgoings. How much do you spend every month on paying off debts, paying bills and covering essentials, as well as those non-essentials that are still… well… essential to making life fun? Then think about how your spending might increase or decrease once you’ve retired. For example, you won’t have to commute. And you might have completely paid off your mortgage. However, you might want to travel more or enjoy a new leisure activity – which will push up your non-essential spending. Don’t forget to allow for any large outlays you may have planned – such as helping your children to get onto the property ladder.

Take stock of your current wealth

The concept of a job for life is somewhat antiquated. So the chances are that you will have accumulated a number of different pensions from various employers over the years. Working out the total value of your pot might involve tracing and contacting previous employers to identify various pension providers. Needless to say, retirement spending is not exclusively about what’s in your pension pot. You may have any number of other sources of income – such as investment portfolios or properties that you are letting out.

Maximise your pension savings

You can always adjust your current financial arrangements if you don’t think that your current pension savings will be enough to cover your expected retirement spending. Another option is to make lump-sum payments into your pension. It’s worth bearing in mind that should you exceed the £40,000 annual allowance (the largest sum you can potentially save in your pension pot in any given tax year), you can use up to three years’ worth of unused annual allowances.

Adjust your investment strategy

The younger you are, the more likely it is that your pension savings will be invested based on a high-risk strategy. This is simply so as to maximise potential returns on your investments. As you near retirement, however, it will make more sense to opt for a lower-risk strategy. The closer you get to needing to access the money, the more the emphasis should be on preserving the wealth that you have accumulated, rather than growing it. Lower-risk strategies tend to mean a lower probability of loss. The flipside, obviously, is slower – but more predictable – growth. But if you want to do everything you can to ensure that your savings last a lifetime, de-risking your portfolio might be preferable. One of the things we do – and indeed continue to do over the course of our relationship with you – is determine your attitude to risk. This helps us establish the right strategy based on your risk appetite and goals.

You don’t have to retire completely

For many people, after a lifetime of stress and toil, retirement cannot come soon enough. But that does not apply to everyone. Many people actually end up finding retirement less fulfilling than they thought they would. And early retirement might not be an option if their savings are less likely to cover what they need to enjoy the years ahead and maintain the lifestyle that they want. More people nowadays opt instead for a phased retirement, slowly reducing the hours they work over a few years. Interestingly, only 44% of people see retirement as giving up work altogether. The increased prevalence of flexible working patterns as a result of the pandemic has been a contributing factor: more people want to step back rather than step away. This gives them the opportunity to continue contributing to a pension. Some people may even decide to start a small business with the lump sum they get at the start of retirement. Different types of retirement suit different lifestyles and different financial goals. We can help you establish what yours might be.

Uncertainty about retirement

Banish that uncertainty. Making such decisions can be stressful, and you should do all you can to check that your savings are enough to allow you to enjoy your golden years. Get in touch with us and make sure that your plans are on track for the retirement you want.