You can’t afford to run out of money when you retire.
One of the benefits of buying an annuity with your pension pot is that it provides a fixed pension income for life. However, these days with annuity rates low and likely to remain so, many people prefer the higher returns possible with a pension drawdown.
This is where your pension savings remain invested, and hopefully still growing while you draw down the funds you need to live on. It can mean a higher income, and the freedom to draw out higher sums if you need to. But it does come with a risk. It is possible to run out of money.
If you get your sums right, your drawdown pension fund should last until you die, and leave some over for those you leave behind. If you don’t, your golden years will start to tarnish.
What can you do?
You need to have a retirement budget plan in place. Your budget plan should include your state pension and any other investments you may have. Its main purpose is to show just what you can afford to withdraw from the fund each year.
This sounds simple, but in practice, there are some complications.
First, you don’t know how long your money will need to last. You and your spouse will not live forever, and there is no need to make sacrifices to preserve cash you won’t live to spend.
But on the other hand, you could both be among the increasing number of centenarians. It might be hard to enjoy your 100th birthday celebrations if you ran out of money on your 99th.
Second, you may need to increase the amount you draw down as you get older. For example, you may currently complete all the work of maintaining your property yourself. As time goes by, those jobs are likely to become more of a challenge, and you may need to call in professional help. Your abilities may decline slowly if you keep active, but accident or illness might mean you were suddenly in need of expensive help even for everyday activities.
You should also think about the costs of long term residential care, which will mean the amount you need will increase substantially as you get older. You may need to have substantial reserves.
There is another complication. Inflation has fallen from its highs at the beginning of the year, but there can be no guarantee that inflation of 3% or more could not break out again. Ten years of inflation at that level would wipe around a third off the buying power of your pension pot. None of us know what the future holds, but it is prudent to budget accordingly, drawing down a little less now to preserve wealth for longer.
How to have your cake and eat it
Everyone’s needs are different, but one rule of thumb is an annual withdrawal rate of 4% of the value of a pension fund per annum. This should give an income of £10,000 from a £250,000 pension fund.
This would leave you with nothing by the time you were 90, if you retired at 65. However, if the sum left invested grows by 4% above inflation each year, its value can be maintained. You can go on drawing down your income, and if you need to eat into your capital to pay for care, there will be sufficient funds.
The key is to make the investment decisions that preserve and grow your capital. Professional help will be essential, and at Continuum, we will be happy to provide it.
The value of your pensions and investments, and the income from them, can fall as well as rise and you may get back less than you invested.
thepensionreviewservice.com – Will I Run Out Of Money In Retirement – 16th May 2018