Retirement planning means taking into consideration a whole range of factors. You have to navigate difficult questions like: How should I invest my retirement pot? What will the impact of inflation be? How much income/capital should I withdraw and when?
On top of these, there is another question that must be contemplated: How long will I live?
This question is unanswerable but figures indicate that some retirees might be getting this number very wrong when it comes to drawdown. Many are running the risk that their retirement nest egg kicks the bucket before they do!
Research by AJ Bell suggests that 50% of people aged 55-59 who’ve entered income drawdown say they have only an adequate amount of savings to last them for 20 years. This may seem like a long time but when you bear in mind that average life expectancy for this cohort of savers is 82 for men and 85 for women, many risk running out of money.
Obviously, none of us know how long we will live. When you factor in that there’s a reasonable 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 pension pot at an unsustainable rate.
AJ Bell also asked their respondents about their withdrawal rates. It 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.
Whilst many use their early retirement to travel and get on with their larger plans, over-withdrawing early on might 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 and an annual investment growth rate of 4% post charges, a 10% annual withdrawal of £11,800 would result in the income lasting just 12 years. However, if the withdrawal is cut to £7,080 per annum or 6% of starting value, the same fund might last for 26 years. These estimations don’t take into account the detrimental impact of inflation, which currently runs at 2.5% (Retail Price Index for the 12 months to February 2019) and assume income payments are taken at the beginning of the year.
Calculating a sustainable drawdown rate is difficult and depends on a whole host of factors. Your financial adviser or planner should be able to give you your best opportunity for a great retirement outcome.
Using Income Drawdown, your fund remains invested meaning the fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
If you have any questions around this topic, please feel free to get in touch with us directly on 01789 263888 or email firstname.lastname@example.org.