How to plan for a flexible retirement and ensure your pension lasts
More and more people are enjoying the options of having greater flexibility in retirement. Yet to effectively plan ahead there are certain considerations to help you make the most of your future.
To help you build up enough of a pot it’s useful to think about the factors which you can and can’t control, and those which you can influence.
For example, with variables like inflation and your life expectancy you can’t predict these outcomes, but you can model for their impacts. You can assume a certain level of inflation each year and also model for the risk that you might live longer than you expect, and think about how you can pay for those extra years.
And this is an important concept: the fact that you do have flexibility to help you achieve your goals, to fund your future. The control you do have is over such factors as how much you pay in fees when you invest, when you retire and how much of a retirement income you target.
One of the determining factors in enabling this flexibility is risk – your ability, need and willingness to take risk to achieve your outcomes. The amount of risk you take correlates strongly with the amount of returns you can potentially receive. And while taking investment risk in relation to funding your retirement may sound unsettling, the volatility associated with risk is greatly reduced when you have a longer time horizon.
When you therefore consider your time horizon and goals (e.g. retirement), you may not need to be as cautious as you expect with the risk level you choose – and it’s important to note you have a great deal of flexibility depending on your individual circumstances and overall investment attitude.
Why you should invest at all is also a vital consideration. In times when returns from savings were quite high it was possible to live securely from bank account interest or similar. But with the persistent low rates we have seen for many years now, that is less of an option, especially with the damaging effect of even relatively subdued inflation over time. Holding too much cash to fund your retirement is therefore a risk you should not accept.
So to counteract the prospect of low rates for some time to come, and positive inflation, we need to think about how to generate returns with acceptable levels of risk. You should naturally aim for a well-diversified portfolio. We offer a range of portfolios with different risk levels (from 1-7) and for each of these we focus on the idea of total returns, different drivers of returns – not just assets that generate an income.
Investors should also be aware that even in good years for markets, of which there are greater instances, there is always volatility. So even when the stock market is up 10-20% in a year, there could be intra-year losses of over 10% or more. Therefore, portfolios need to be able to adapt to a range of environments and investors should recognise that this volatility is a fact of investing, and most importantly not to overreact to such events. We should generally trust in markets to deliver over a sustained period – trying to play the dips in the market can be a challenging ride.
And because planning for retirement starts well in advance, it is crucial to take advantage of the various tax-free vehicles – not just pensions, but also ISAs and JISAs to ensure family wealth is accumulated efficiently. While the various limits can help you to build up a significant pot over time, the accrual of the assorted pots helps to provide greater freedom too, to efficiently maximise your withdrawals in retirement.
For example, to help ensure your money lasts longer in retirement, it might not be the most efficient route to withdraw all your income from your pension first – you may be able to structure your withdrawals so you draw some from a pension, some from an ISA and some from general investments which may be outside of a tax wrapper but where you can use your CGT allowance.
You have options for a flexible and comfortable retirement. At Netwealth we help you to make the most of these options, by giving you the tools and technology to help you to stay in control and to more easily plan ahead – and by offering you the guidance and the expert advice to help you achieve your goals.
For more information visit www.netwealth.com.
Please remember that when investing your capital is at risk.