While it’s important to accrue a meaningful pot for retirement, it can be difficult to assess how to make that pot last – and how much of an income you can reasonably draw. We take a look at the practical implications of drawing from a pension pot and sustaining the level required for a comfortable retirement.
Managing your future cashflow
While you can never be completely accurate about your financial future you can use some assumptions to help you gain a decent picture of your potential outcome.
Cashflow modelling allows you to gather and analyse information about your income and outgoings, your savings, assets and investments. Building a financial plan, or revisiting it, can help you to gain a clearer view of where you stand.
To then project how your future pot may be impacted you can take into account various life events such as your retirement or working less, gifting for your children and how much you may want to leave behind.
Cashflow modelling can help you to answer important questions such as when you could stop working and how long your money could last. Other factors will also have a material impact.
Prepare for a changing income – and expenditure
Your income may rise steadily throughout your life but you will likely have to adjust to a new reality as you face retirement. Initially, at least, your expenses could be lower if your children have moved out and you have paid off your mortgage. You may also be working less or part time before you retire fully.
What you spend, too, could also fluctuate – you may not be commuting, but you could travel more for your leisure. You may also devote more time to hobbies and eating out. Either way, what you take in and what you spend will likely have a different profile compared to before. As you can defer when to take the state pension you might also weave that option into your considerations if you want to optimise your income at a certain stage.
Consider how much you want to leave
When you are making your projections for how long your money should last, you should also think about whether you will likely deplete your assets over time or wish to leave a sum for your beneficiaries. The choices you make will affect how much you can draw on each year.
If you are thinking about leaving some for your loved ones, consider how to do it most efficiently, by gifting, for example, which we explore in detail here.
Other key considerations:
Returns may be lower in future
As a broad indicator, returns for the MSCI World Index have averaged at 8.6% a year between 31/12/1987 and 30/06/2021 but there is no guarantee – or indication – this level of growth will be maintained in future. A Charles Schwab projection, for example, estimated that growth in US large cap stocks may be over 4% less a year from January 2021 to December 2030.
It’s wise to keep the oft used performance disclaimer in mind: Past performance is no guarantee of future returns – a mental feat that may be trickier in practice. Although it’s always sensible to be on the conservative side when projecting how much you may get back from an investment.
You should prepare for even benign inflation
While there has been a fair amount of commentary around inflation in 2021, actual inflation has been rather subdued over the past few years. Yet you should have a firm plan in place to counter the effects of even 2% inflation.
Take a look at its impact in this analysis – and see how much more you may have to set aside to achieve the level of comfort you prefer and to make your money last longer.
You could live longer than average
The average life expectancy may have reached the 80s now, but the fact is, more and more people are living into their 90s. A 2019 bulletin from the ONS estimated that those aged 65 in 2018 would live to between 85 and 87 and over 1 in 4 females born in 2043 would live to at least 100. And these are average figures for the whole of the UK.
So how do you pay for those extra years? How do you ensure you don’t run out of money too soon? You should make allowances for living longer when making your projections.
Sensible planning goes a long way
A sensible plan helps you to build your assets as you prepare for retirement and withdraw from them efficiently when you reach that stage. While you cannot control factors such as market performance and inflation there are several factors you can control when investing. Recognising these – and by altering course where necessary – can make a meaningful difference to your eventual outcome.
You should also be sensible when taking your money at retirement. An effective withdrawal sequencing strategy can help you to adjust to your circumstances and a changing economic and market environment. While a 3-4% figure is often cited as an ideal withdrawal rate this percentage is often simplistic, backward-looking and doesn’t consider the return pathway you actually experience.
We are all different, and we need to be adaptable – including having enough cash on hand if we are experiencing a period of market stress during retirement.
To get a clearer picture of how much income you can generate for retirement you may need a better quality of insight. Our online planning tools can help you to model for various scenarios to see if your planned contributions could help you to reach your goals. You can change variables such as tax rates, risk level, contributions and withdrawals to create a valuable impression of how your finances could unfold.
You may also find this webinar on generating a reliable and steady income for your retirement useful. Our team demonstrates how to select the right risk level for your investments, key actions you can take to help your pension pot last longer and investing for drawdown.
Of course, you may need some tailored advice at some stage to help you make the most of tax wrappers, interpret complicated pension rules or to efficiently pass on your wealth. Please get in touch with us at any time and let our experts guide you or give you the specific advice you need – allow us to help you maximise your financial opportunities in retirement.
Please note, the value of your investments can go down as well as up.
Netwealth offers advice restricted to the services provided, and does not provide independent advice across the market. Netwealth does not provide advice in relation to tax, insurance or estate planning.