Retirement planning means taking into account a whole host of factors. You have to navigate tough questions like, ‘What will the impact of inflation be?’ or ‘When will interest rates start to creep up?’
As well as these, there is another question that must be considered: ‘How long will you live?’
This question is unanswerable but figures suggest that some pensioners might be getting this figure very wrong when it comes to drawdown. Many are running the risk that their retirement pot kicks the bucket before they do.
Research by AJ Bell indicates that 50% of people aged 55-59 who’ve entered income drawdown say they have only enough savings to tide them over for 20 years. This might sound like a long time but when you consider that average life expectancy for this cohort of savers is 82 for men and 85 for women, many people risk running out of money.
The reality is that none of us know how long we will live. When you factor in that there’s a fair chance that a few of AJ Bell’s respondents might live to 90 or even 100, it’s clear that many pensioners could be drawing from their savings at an unsustainable rate.
AJ Bell also asked their respondents about their withdrawal rates. They discovered that 57% of people in the 55 to 59 age bracket are withdrawing more than 10% of their fund each year. This reduces to 43% of people in the 60 to 64 age bracket and 34% of people in the 65 to 69 age bracket.
While many use their early retirement to travel and embark on their larger plans, over-withdrawing early on could mean that they end up without the money to cover costs that arise in later life, such as care costs.
The average size of the fund in AJ Bell’s questionnaire was £118,000. Based on this, a 10% annual withdrawal of £11,800 would result in the income lasting just 12 years. However, if the withdrawal is reduced to 6% of starting value, the same fund might last for 29 years. These estimations don’t take into account the detrimental impact of inflation, which currently runs at 2.7%.
Working out a sustainable drawdown rate is difficult and depends on a whole range of factors and assumptions that should also be checked on a regular basis to make sure that they are still valid.
A financial planner can show you how today’s choices can impact the future and help you make more informed decisions about your finances. Planners are always looking into the future to ensure client goals are met, and the more time you have, the more impactful the recommendations can be. Is it time you developed a financial plan?
If you are interested in working with a “financial planner” I would encourage you to seek out an adviser who has the Certified Financial Planner qualification (CFP) which is an international accreditation. You can find a CFP qualified adviser using the following link. http://www.financialplanning.org.uk/wayfinder/find-planner