5 Common Questions About Investing for Income in Retirement
1. How much money will I need?
You are the expert in your cost of living, you’ll have an idea of the total monthly figure as that’s normally regulated by your monthly income. You may well see an increase in holiday/travel spending when you retire, but the mortgage and commuting costs should have gone.
The rule of thumb at a high level is that you’ll need around 25x the income you want as the lump sum engine to fund that withdrawal. Don’t forget the new state pension is £9,339 per year, and tax efficiency is key.
People worry about the potential costs of long term care; in our experience it should be a key consideration but it is not often a crippling reality.
Dying with too much money left is a problem if unplanned. At age 60, roughly, you’ll still be spending money for the next 25-30 years, though in the latter years it tends to be very little, other than health care and gifts.
Your spending is split between non-discretionary (living expenses like heating, shopping) and discretionary (travel, sports, luxuries). It’s important to be sure of what income you need, as well as what you want: being secure of the ‘need’ settles a lot of anxieties.
2. How long will the money last?
There are some quite complex calculations that can be used to analyse whether you will live longer than your money will last, however a strategy that uses natural income is always more defensive than one that relies on spending down your capital.
It’s possible to model with some accuracy, and that’s what a financial planner will do. Plans are organic – they are not fixed, they do change over time, so it’s important to work with a planner you’ll be happy to work with over the years.
Being forced to turn to children or to seek work at a later age creates much anxiety for many retirees. It is important to view your income sources over the long term as short term solutions in protecting capital will often severely damage long term income.
3. How reliable will my income be?
There’s a difference between ‘reliable’ and ‘guaranteed’ so it’s important to be clear with what you want, need, and what you are expecting. With interest rates and gilt yields at record lows, guaranteed income from cash interest rates and annuities is also the lowest ever: there is a big price to pay for guarantees. Investment based income has a very long history and it is quite possible to target what has previously been over 95% reliable, year in year out. Remember though, the past is not necessarily an accurate road map of the future.
If you want to have your income guaranteed, then an annuity is the way to go. The rates are driven by gilt yields so they will be very ‘unexciting’ in current times, but that’s price for ‘guaranteed’.
There are decades of statistics covering income sources of all types – it’s important to select what is relevant, ignore the rest of the investment ‘noise’, and make sure the relevant research is done.
It’s very important to understand that capital and income are not directly correlated – people frequently mistake fluctuating capital values as creating risk to income, whereas the research shows that is not correct.
4. Can I spend now, and cut back later?
Retiring with a pension fund instead of a final salary scheme has several key advantages, one being that you can be flexible about your income from year to year. Health normally dictates that we are more active in younger years, so discretionary spending falls in later years, though this can be balanced by increased health spending.
To be flexible in your income it is very important to understand what is generating the income for you – it is often dangerous, and always unpredictable, to rely on stock and bond prices to fund your income in, say, fifteen years’ time. As you know, stock markets are volatile from year to year, which doesn’t seem to match your need for a regular, reliable income.
5. Do I need to change my investments for retirement?
Perhaps; what you do need to do is be absolutely clear about how your portfolio will generate sufficient cashflow to fill your income needs. It is important to understand how your existing portfolio will change/grow over time, and how you will be able to use those returns to create a regular income – don’t forget, you may be retired but all your bills still run on a monthly basis. Flexible income won’t match fixed outgoings without some accurate planning.