How to manage money in retirement
So, the day has finally dawned, retirement is here, no need to set the alarm clock for 6am every morning, no need to force yourself out of bed on a cold dark winter’s morning ..…. so far so good. On the downside there will also no longer be a salary hitting your bank account every month.
How you choose to manage your money in retirement will often depend on the savings you have accumulated during your working life. You may be lucky enough to have a final salary pension. If this is the case your ex-employer is responsible for paying you a regular steady pension throughout your lifetime, and the added bonus is that these types of pensions are often increased each year in line with inflation. Unfortunately, Final Salary Pensions are becoming less commonplace and more often people will have accumulated various personal pensions throughout their working lives. This will mean they have a pot or pots of cash which must be used to meet their income needs in retirement. If that’s you, then read on.
OK, so what should I do?
The first thing you should do is consider how much money you require on a monthly basis to meet daily essentials, such as a roof over your head, heating, council tax, transport costs, clothing and food.
Ideally you should have secure income sources to meet these essentials. By secure income we mean income from final salary pensions, state pensions or annuity income.
Annuity income – a secure source of income which will be payable for life – can be purchased by using some of the funds in a personal pension arrangement. Provision for spouses and inflationary increases can also be added to annuity contracts.
My essential income is secure, what’s next?
Next you need to consider your discretionary costs. This is the cost of doing all of the things you want to do in retirement, which is the part people often struggle with. You have worked all these years in preparation for retirement and now is the time to enjoy it, so you need to sit down and consider what you really want your retirement to look like. How much would you like to spend on holidays? Where do you want to travel to? How often would you like to eat out? And what about hobbies, how will you fill your time and what are the associated costs? Then you need consider how long you would like to maintain this lifestyle. Inevitably there does come a stage where your spending will likely reduce although, having said this, we know several octogenarians who are still leading amazing lifestyles.
You should also consider potential one-off expenses, perhaps cash to help children with a deposit to buy their first house or a contribution towards a child’s wedding, or it could be that much talked about Lamborghini purchase or a round the world year-long cruise.
Ok, so now I know how much money I need each year, how do I work out if my pension funds will last throughout my lifetime?
This is where I would recommend finding a good financial planner who uses cashflow modelling within their ongoing service proposition.
Cash flow modelling, what is that?
Essentially it is software which allows a financial planner to map a client’s assets and liabilities, income and expenditure, and, based on set assumptions for growth and inflation, they will be able to demonstrate whether your funds are likely to be sufficient to meet your lifestyle requirements throughout retirement. The results may show that you can meet your lifestyle needs and are still likely to have significant funds left in later life. This may in turn lead to discussion around increasing your spending for a period of time. Alternatively, if the analysis shows that funds are likely to run out throughout your lifetime, it may prompt a discussion around scaling back your plans a little.
Is there anything else I should consider?
Like all good plans, you should review your situation annually. Life tends to send various challenges our way and financial plans may need to be revised to deal with any unforeseen expenditure or legislative changes that can occur.
Any last words of wisdom?
Its also a good idea to hold a reasonable level of cash in readily accessible bank accounts. Research has shown that drawing an income from your investments during periods of stock market volatility can have a significant impact on the capital value of your investments. If the stock markets hit a rocky period you will at least have the option to stop or reduce income payment until such time as they recover in value, using your cash reserves to meet any income shortfall during this time.
The views expressed are those of Thorntons Investments. The contents of the article are solely for information purposes and are not intended as advice.