Don’t Outlive Your Money

How much is enough for your retirement?

Many people often think about this but few take action to address it.

Research indicates that us Brits are one of the world’s worst at saving for retirement. The average British worker saves less than £1.80 a day for their retirement.

That’s less than a cup of coffee!

Others do save for their retirement but they still end up outliving their money.

I expect this is because their plans didn’t properly consider the following important factors:

  • Retirement is likely to last longer than you anticipate.
  • Income is needed for your whole lifetime, not just when you first retire.
  • Inflation and tax gradually erode your prosperity.
  • Age-related expenditure can quickly erode your prosperity.
  • Confusion between lifestyle assets and investment assets.

Your Retirement Is Likely To Last Longer Than Anticipated

In a survey conducted by AgeUK, UK citizens aged between 65 and 69 years were asked to describe their age. Only about two out of ten chose ‘middle adulthood’ and seven out of ten described their age as ‘old age’. Statistics, on the other hand, indicate that the population of people aged over 85 will more than double in the next 23 years.

This implies that more than half of the current 65-year-olds will live to see their 88th birthday.

That’s a long time to spend in old age. Health is a hugely critical factor but in general, the mindset needs to change to 65 years young.

The minority, who had a younger perception of their age stage, was more in touch with their true life expectancy than the larger group. The majority may incorporate this misconception of their life expectancy into their retirement planning at huge financial cost.

To get a more precise estimate of how long you will live, have a check with the Office of National Statistics calculator then adjust your retirement plans accordingly.

Please remember that averages can be misleading.

You could live to 100+ and should plan your finances accordingly, but also die tomorrow and should live your life accordingly.

YOLO is not just a catchphrase for millenials.

You Need the Money for Your Whole Life

Many retirement plans fail to factor in the need to maintain living standards during your entire lifetime. We can be tricked by seeing a large fund size and assuming that we are wealthy.

Many of us haven’t seen large sums of money during our lives, and when we see a pension fund of say £250,000, you can mistakenly interpret your situation as one of being prosperous.

This isn’t necessarily true.

Most of you will still invest via a financial adviser and therefore, after the numerous layers of charges, it’s reasonable to assume an investment return of 5% each year.

A 5% return is only £12,500 each year, if you spend more than this you will be eroding your capital.

But wait it gets worse.

You need to factor in poor investment periods and inflation.

That means you will need some of the return to increase the nominal value of your investments to help offset the effects of inflation.

The rule of thumb is that you can take 4% each year in withdrawals and it should be sustainable.

So a withdrawal of £10,000 each year (or only £833 each month) is the sustainable income you should be able to withdraw and maintain your capital so that it can always provide that income in the future (even then it’s not 100% guaranteed – unfortunately nothing really is).

Plus that income may well be taxed if you haven’t arranged your affairs tax efficiently!

Having a monthly income of £883 looks and feels a lot different to having £250,000; but they are essentially the same thing.

To ensure that you have sufficient reserves to last your whole life, it is advisable to do the following:

Increase your retirement contributions. If you are still working, increase your contributions towards your retirement pots (the earlier this is done the better).

Drastically review your expenditure. You really cannot afford waste and it’s time to challenge expenses that you take for granted as being necessary.

Don’t retire but perhaps pick up a different tool. You do not have to retire just because you have reached age 65. You can take your state pension and continue working in some way, shape or form. Don’t retire completely unless you really have to. Whilst you are no doubt tired of working, maybe you could take up a new role or project; even if only on a part-time basis.

Change is probably better than a rest and if you can delay or reduce accessing your retirement funds it will help them last longer. It should also help you feel more fulfilled. Now may finally be the time to follow an entirely new passion or direction.

Confusion between lifestyle assets and investment assets

How many of you are holding onto your house?

Your house is not a financial asset; it is a lifestyle asset.

I feel there is far too many that are emotionally attached to their home with a huge impact on their finances.

A financial asset provides an investment return (which you usually don’t have to actually work for – save for a bit of research and administration). A lifestyle asset costs you in upgrades, servicing costs and endless labouring of love. The two assets are vastly different.

Just as you should never get emotionally attached to a share, you should not become too emotionally attached to a home – especially if your now the only one left in it.

I fully appreciate that this is a very difficult decision, but you have to understand that the memories you have made are not in the building, they are in your mind; and it’s never too late to look forward, not backwards.

Downsizing can free up further capital for investments that provide you with extra income, and a smaller property will have lower upkeep and living costs.

Whilst financially it’s a win-win decision, I understand that emotionally it may feel like a step backwards, or a lose-lose choice. However it’s preferable to make the decision actively and take control of your wealth, than to wait until you financially have to sell up because you have no other money left – you can’t eat your house after all.

Planning is essential

A comprehensive retirement plan will therefore provide the following benefits when planning for your retirement and ensuring that you don’t outlive your money:

  • Forecast life expectancy.
  • Critically analyse your cash flow.
  • Help you understand your finances.
  • Ensure you have an appropriate, low cost and sensible investment strategy.
  • Project personalized sensible income rates from your investments.
  • Consider likely investment returns, inflation rates and other factors to assess how long your money will last.
  • Ensure you don’t outlive your money.
  • Build understanding of your financial position.
  • Help you enjoy a fulfilled retirement, whilst ensuring you don’t outlive your money.

Get in contact today for your personal and comprehensive financial plan.

Get in touch today for a personal, independent, and comprehensive financial plan.

Mark Underdown | DipPFS IMC CeMap

Financial Planning Consultant


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