The thought of not having enough money to live on during your retirement is not something that those with sizeable pension pots, nearing the end of their working lives, have had to worry about until recently. However, this is now an issue causing more and more sleepless nights, as reported in a recent article in The Telegraph looking into the financial situation of those who had apparently saved well but were now facing potential hardship.
Both crumbling annuity rates and final salary pensions becoming scarcer and scarcer have been cited as reasons for this. Recent figures suggest that the workplace pensions for those in younger generations are receiving only 5% of the funding experienced by those still set to benefit from a final salary scheme when they retire.
Other contributing factors include the introduction of pension freedoms in 2015, allowing funds to be withdrawn from pension pots in a manner similar to a savings account. The problem with this is that, even with financial advice to ensure a “safe” amount is being withdrawn before retirement, if the financial conditions at the start of your retirement are unfavourable, this could still cause a gap in your savings that is impossible to repair.
The Telegraph looked at a similar situation experienced by Richard Seymour and his wife, both in their late eighties, who felt they had planned for their retirement carefully. Former business owner Richard had saved around $200,000 (approximately £135,000) as well as paying off the mortgage on their home, hoping that this would “guarantee that we’d have a roof over our heads no matter what”.
Whilst Richard saw this plan as “fail-safe”, the couple’s retirement funds were severely affected by both stock market reversals, the unexpected departure of a number of Richard’s business clients, and poor returns on their investments. Another factor, however, is that the couple “never expected to live this long”, highlighting the growing importance in financial planning of the ever-increasing life expectancy numbers.
So what is the best way to ensure you don’t find yourself in a similar situation when you retire? As always, formal, individual and independent financial advice is the best route to ensure you can retire, but there are a few general approaches that might help to make your pension last.
Firstly, and perhaps most obviously, don’t withdraw too much from your savings every year. Secondly, if you are withdrawing a fixed amount but the markets fall, realise that this amount may need to change, or other sources of funding may need to come into play. In this situation it’s often better to be flexible about the amount you withdraw, reducing when necessary to avoid damaging your overall pension pot. Thirdly, and perhaps most importantly, the more you can save initially, the less likely it is that your funds will run out. Whilst we encourage clients to spend as well, when it fits in with their plans, there’s generally no such thing as having too much money in your pension!