Retirement Rule 1: Don’t run out of money – financial planning week

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This article has been provided by Satis Wealth Management, a sister company of Hillier Hopkins.

Of all the financial challenges and concerns that we face over our lifetimes, avoiding running out of money in retirement probably sits at the top of the list. No-one wants to end up relying on state benefits. As Warren Buffett might say, Retirement Rule 2 is not to forget Retirement Rule 1!

In the good old days, retirees could rely on defined benefit pensions and/or annuities to provide lifelong retirement income. Today, many retirees rely, to a varying degree, on taking money from accumulated pension pots for their retirement income. That makes outcomes less certain and decisions far tougher.

Recently LV – the insurance company – published the results of a survey of 4,000 people[1]. LV estimate that there are around 30 million pension holders in the UK.  According to the survey one third (effectively 10 million people) do not know how to make their retirement pot last.

Knowing what you cannot control and understanding what you can, provides some insight into the complexity of – and solutions to – retirement planning.

Retirement is meant to be a time of financial freedom allowing you to do the things you want to do when you want to do them and who you want to do them with. As a broad rule of thumb, today, £1 million will buy an inflation-linked annuity income of around £27,500 a year[2]. Yet the median UK pension pot is around £91,000[3] (for those 55-64 years old), which on the same basis will deliver only £2,500 a year.

Taking an income from an investment portfolio may allow a withdrawal rate that is potentially a little higher but needs a lot of care and attention to reduce the risk of running out of money. Making sure that you optimise the decisions that need to be made, will allow you to maximise the stability, level, and longevity of retirement income you need.

That is what a good adviser will help their clients do and where they earn their fees.  The best way to achieve Retirement Rule 1 is to take proper financial planning advice.

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[1] 10m pensioners risk running out of money, FT.com 26th August 2021

[2] https://www.scottishwidows.co.uk/retirement/retirement-explained/taking/pension-options/guaranteed-income/index-linked-annuity/

[3]     Office for National Statistics. https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/datasets/pensionwealthwealthingreatbritain