5 WAYS TO GUARANTEE RETIREMENT INSECURITY
- 5 key risks which you should carefully consider before you retire
- What to do if you want to avoid retirement insecurity
Of course, you want to avoid retirement insecurity. Despite this, when it comes to making important retirement decisions, many ignore some or all of the biggest threats to their financial stability. Take a look at our top 5 ways to retirement insecurity to avoid these risks affecting your retirement plans.
Inflation is the change in the cost of living over time. It can be very difficult to estimate the way this affects your retirement insecurity. Inflation is the biggest cause of retirement poverty for those on limited or fixed incomes. When your earned income stops, your income may have to stretch further. If your expenses grow at a faster rate than your income then you are going to run into problems in the future.It can be easy to ignore the effects of inflation, especially since it has been very low in recent years. The historical average inflation rate tends to be higher, at around 3% per year in the UK for the past 20 years. If you want to guarantee that you must spend less in the future you should go for a fixed income in retirement that never rises. The best way to beat inflation is to take a guaranteed income with built-in increases (such as an annuity linked to inflation), or to take some investment risk. Despite this, most people take a level income when guaranteeing their pension income through annuities. The main reason for this is that the initial income from the annuity will be higher with a level payment. If you take this decision, over time you will reduce the purchasing power of your money. Read more about inflation.
Underestimate how long you’ll live
Longevity is very important when planning retirement risks. It is tempting to assume that you will live to the age of previous generations, but this assumption ignores the great progress we have made in prolonging life.According to the Office for National Statistics, if you are aged 65 today, on average a man would live to age 86, and a woman to age 89. Half of the population will live longer than the average; in fact 1 in 10 of us will live to beyond age 100. You had better be sure that your retirement income does not run out before you die. Otherwise, you can be sure of retirement insecurity in your future. Read more about life expectancy.
Take reckless investment decisions
You take investment decisions, whether you realise it or not. Deciding to invest, or not to invest involves taking some sort of risk. Think of risk as a scale, from no risk, through to cautious, moderate and adventurous. If you take more risk, you have a greater chance of short-term fluctuations in your investments. When it comes to dealing with your retirement insecurity, this can have implications in 2 ways.Income guarantees
As you approach retirement, you should think about what you want to do with your funds. If your plan it to secure your income with a guaranteed annuity, you should reduce the risks you take as you get closer to your retirement date. If you do not do this, you run the risk of losing value in your retirement funds just before you lock in your future income with an annuity purchase.Flexible retirement
If you decide to take a flexible retirement income through drawdown, your investment term will be much longer. Think about the risks you are prepared to take, as well as the risks you need to take. Your funds might run out sooner than you need if you are too cautious with your investments. You might suffer investment losses at inappropriate times if you are too reckless. Your income withdrawals deplete your funds quicker than you would want, especially if your investments fluctuate in value at the wrong stage. You need to manage your withdrawals carefully.Read more about risk v reward with investments.
Overlook the effect of interest rates
This is an important issue when making retirement decisions, because annuity income rates are based on long-term gilt yields. If interest rates fall, so do the yields on long-term gilts. This issue affects the annuity income rates payable. Unfortunately, recent interventions by the Bank of England have pushed interest rates down to the lowest ever level. If you are about to buy a retirement annuity, you currently get less income than you would have 10 years ago.Interest rates also affect bank savings interest. Many retired people want to keep a cash account to avoid risk (and minimise retirement insecurity). If you take this approach you may find that your savings grow at a very low level, and could lose money compared to inflation over time.
Don’t allow for changing circumstances
Your personal and financial circumstances will change over time. If the average life expectancy in retirement is at least 20 years, you are likely to go through a number of life-changing events and needs.One spouse outliving the other
Think about the possibility that one spouse may outlive the other. Consider whether your incomes will be affected after the death of one spouse, as it is common for many workplace pensions to pay a lower income after the death of the member of the scheme. If one spouse has greater income from pensions than the other, you should think about bridging the disparity between the two incomes after the death of the spouse with the larger income.If you are about to make decisions with your pension savings, consider what needs your spouse may have for future income. Some retirees opt for benefits just for themselves, but ignore the needs of their spouse after their death. You should consider factors such as whether your spouse is significantly older or younger than you.Health and long term care
The other main issue to consider is your health. If is typical for retirees to have initially robust health, but for later in life for them to have greater health issues to deal with. This may mean that you have a greater need for income in the early years of your retirement than in later life as you pursue hobbies and travel while you are still fit and able to. Of course, the reverse could also be true since if your health deteriorates in later life, you may need long term care. This is not an easy decision to make, and leads many to consider flexibility of retirement income instead of guarantees that cannot be changed later.
What to do if you want to avoid retirement insecurity
If you are approaching retirement, you should consider these issues carefully. Take some time to talk these risks through with your family and your partner. Also, don’t forget that you should review these issues regularly as your situation changes and develops.
Contact us if you want to examine your retirement income options professionally. We also offer a free retirement checklist – just complete the form below.
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About Dan Woodruff
Certified Financial Planner & Chartered Wealth Manager at Woodruff Financial Planning
Financial Planning helps you to navigate and anticipate significant life changes. I want to help you to ensure your money is managed wisely to give you the financial security that will fund the future and lifestyle that is important to you.