26th May 2015 at 3:03pm
Making our retirement money last longer
With recent statistics showing we’re living longer, it looks like we could be spending in excess of 30 years in retirement. As a result, it’s important to understand it isn’t only how much we save but what we spend that determine whether our nest egg will last. We need to decide the rate at which we can afford to deplete our pension pots and still enjoy the life after work we want.
Is 4 the magic number?
However, there’s a rule of thumb popular in the States that’s now widely used by financial planners to address this question. Back in the mid-1990s, William Bengen, a financial planner, introduced what is generally known as ‘the 4% for retirement’. The rule suggests that a retirement portfolio invested equally (50/50) in stocks and bonds will last 30 years if a person withdraws 4% of savings in the first year of retirement and adjusts that amount annually by the rate of inflation. Basically, you could think of it as the natural income which comes from investments although this can go up or down over time.
It’s up for debate
But it’s just a rule of thumb and there’s a school of thought that 4% is perhaps too aggressive given historic low interest rates.
For inflation-adjusted spending, 3% might be a better starting point. If 3% is too low, you can withdraw more if you’re willing to be flexible with spending. Or you could avoid self-managing the risks and use some funds to buy an annuity to cover basic expenses over the course of your retirement.
A reality check
It’s a debate that will rage on. But what is clear is we all need to be saving more and for as long as possible and give real thought now as to how we’ll take that cash in retirement. You don’t want to reach a time where you’ve been retired for 20 years and find you’ve some incredibly difficult financial decisions still to make because you don’t have enough money left.
Find out more about the 4% rule
If you’d like to hear more on the 4% rule and the debate around it, there’s an interesting article on the BBC website from their personal finance reporter Brian Milligan entitled ‘Could you run out of money before you die?’ The article also has some handy calculators sourced from a number of institutions that will help you do a spot of financial forecasting yourself.
The information in this blog or any response to comments should not be regarded as financial advice. A personal pension is an investment. Its value can go up or down and may be worth less than you paid in. Laws and tax rules may change in the future. The information here is based on our understanding in April 2015.
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