6th February 2015 at 3:31pm
I’m looking forward to my retirement; to more holidays with my family and more games of golf.
But this all costs money – especially if I’m funding a retirement of 20-30 years.
So, if I’m to plan confidently for a comfortable retirement I need my pension pot to work hard – for long enough. And this means I need to keep investing some of my money once I retire.
Continuing to invest after you’ve stopped working needs a different approach to how you may have invested while you’re saving up for retirement. In retirement, you’ll need an approach that helps you balance the level of income you need to take with how long you need to take it for.
Here are some of the key factors that will determine how long your pension pot will last.
The long and short of risk
Taking on some risk when you invest gives you the opportunity to get a better return than you’d get from a bank account – and a chance to beat inflation over the long term.
When you save in stocks and shares ISAs or in pensions you’ll be aware of the message that ‘the ups and downs of stock markets average themselves out over the longer term to outperform cash’. And that’s correct, over the longer term.
However, in retirement you’ve more than one objective.
On one hand, you want to grow your money so you’ve enough to last you over the long term.
You might be comfortable taking some risk with this money as you’ll not be touching it for some time. But you also need to take money out of your pot to give you income in the short term.
You might not be so comfortable taking risk with this money especially as you’re unlikely to be earning any more.
When you retire, it’s helpful to think about your money in separate ‘pots’.
You need to think carefully about how much risk you take with the money you need to use as income but it may be necessary to take some risk with the pot of money that’s set aside to make your pension last over the longer term.
The truth for most of us is that in order to make our pensions last, taking some risk to access better growth is necessary.
Taking an income from your pension pot – known as income drawdown – often involves withdrawing a fixed amount at regular intervals.
If the value of your investments drops then that fixed amount becomes a larger proportion of your overall total pot. Once you’ve taken it out, it can’t recover when the market rises.
This means that if you take money out of a higher risk investment when the markets have fallen, the impact of your withdrawals could be magnified – and lead to your pension pot running out faster.
‘Make or break’ your pension pot
Performance in the early years after you retire has the biggest impact on how long your pension pot will last.
Research suggests that the return you make on your investments in the first three years of retirement could account for more than a third of the overall outcome.
So, if the value of your investments falls in the early years of your retirement it could dramatically reduce how long you’ll be able to take income withdrawals from your pension pot.
This is because it’s hard for the investments to ‘catch up’ after you’ve taken an income out while markets are falling. Managing how much investments move up or down in these years is important, as it can ‘make or break’ your pension pot.
Key things to remember
- You may need to invest over the long term to help your pension pot last as long as possible
- But how you’re invested, particularly in the early years of your retirement, can have a dramatic impact on how long your pension pot will last
- Any solution you choose needs to carefully manage risk – to protect the income you need in the short term but to take enough risk to help your pension pot last long enough.
Whether we live into our 80s, 90s or longer, we’re all responsible for making sure we have enough money to last us when we retire. The good news is that there’s a range of ready-made solutions to help.
They’re designed to manage risk and address these challenges. Just remember to take advice if you need to – for many of us planning our pensions is the most crucial time to seek professional guidance.
A pension is an investment. Its value can go up or down and it may be worth less than you paid in. Investment returns aren’t guaranteed. The value of your investment can go up or down and may be worth less than what was paid in.
This blog and any responses are not financial advice.