Investing for a Sustainable Income in Retirement
By Jan Oliff
No two people live their lives in exactly the same way. You may earn the same as a colleague doing the same job but the way you spend your earnings will differ in the same way that you have a unique way of performing your daily work tasks. Similarly how you plan and approach retirement will be a very personal experience.
Some people start planning for retirement in their 30s and others leave it until the last few months, in fact some people spend less thought on retirement than they spend planning their annual holiday.
The money side of retirement planning is only a part of a major life change but it can be a stumbling block if you aren’t confident about how to obtain the necessary information and how to interpret it.
Inevitably when you start thinking about financial matters it is averages and statistics that get quoted and yet we all agree that, as unique beings, we are neither average nor a statistic.
Retirement expectations
Contrary to what you may have been told, planning a sustainable income to see you through retirement is a simple process. You need only to add up and value all your assets, establish what sustainable income they can generate and match that to your future life style.
Depending on whether that income meets your expectations you will have either a comfortable life or a bland and boring one, devoid of any treats or choices. Regardless of whether you have made regular savings towards your retirement or not, your current assets are an established fact and although their value will change in the future you cannot turn back time and make them bigger. The current choices now must be forward looking.
Firstly you need to list all your assets [that is everything that could provide income] and don’t forget to include you and all your saleable skills. For some of us the need to work is purely financial but for many it fulfils other needs.
The looming skills shortages mean that your contribution is still needed and the transition from full time work to full time leisure can be eased by part time work. If the reason you are retiring is to look after someone else, then the financial benefit of you as a carer should not be overlooked.
When valuing your home do not think of its value as what a buyer would pay for it but think of its real benefits to you. What does it provide you in comfort, is it a centre for the family to return to at Christmas? Do you live in the right place or would you prefer to move, maybe to be more convenient for friends and family? It may have been the most convenient place to live when you needed to commute to work each day but is that still a real need? Would moving release additional income? And finally could your home be used to generate extra income?
Your Pension - should you take a lump sum?
If you have a pension you must understand the full range of options available to you. One of the most straight forward questions is should you take a lump sum or not and if you do take it does it mean you must also take the income now?
If you have a partner, what impact do your pension decisions have on them and how do theirs affect you? Do you loose your life assurance at retirement and does it matter anyway? Should you be adding to your pension before you retire in order to maximise on the tax relief?
What can you expect from state benefits? You can obtain an estimate of state pension benefits at any time, you don’t have to wait until the year before you retire. There is a government form BR19 for the purpose. And delaying taking state benefits, if you don’t need them, gives you additional benefits later!
Savings and investments should be listed by different “asset classes” as they have different tax treatment: Deposit accounts, Cash ISAs, General ISAs, National Savings, Insurance Bonds, other collective funds, Stocks and Shares, investment properties and other specialist investments such as paintings and antiques – but remember they are only an investment asset if you are prepared to trade them.
Investment property rule change
At this point it is worth mentioning investment properties, as their value to you could change substantially next April (08). If you are relying on the benefit of capital gains tax taper relief, you should take advice on whether to sell before the rules change. If you intend to keep them for the long term rental income you should be certain that the income is really sustainable and that the properties are not likely to be a deteriorating asset.
All the evidence shows that new tenants have an increasing choice of high quality properties to choose from, make certain that yours is still likely to be an attractive proposition in 20 plus years.
Unless you are relying on inheriting (not an ideal way to plan your life) or know you are terminally ill, you presumably want your income to last as long as you do but have very little idea of how long that may be. Most statistics demonstrate that you are likely to live far longer than you expect and those statistics are easily accessed through the internet.
Another statistic worth mentioning is that having survived your 50s you are likely to have limited call on health services until average age 72. The current wisdom is that, having valued all the assets that are available to provide income and assuming you have a decent spread of investments through a range of asset classes, you should assume a net income of no more than 4% (less if possible) if you want sustainable income. Anything more will produce a reducing income against inflation.
Yes, it is still possible to obtain more, but a high income now will leave you with a subsistence income later!
Sensible middle age spread?
It is important to have a range of assets including deposit accounts for easy access in difficult times, fixed income including gilts and corporate bonds, commercial and residential property and UK and overseas equity. If you have sufficient capital to buy a range of assets directly you are very privileged but if not you can achieve the same spread of risk by using collective funds.
The important thing is not to put all your money into one asset class as each one has its own cycle – remember the property crash of the early 1990s, the stock market crash of 1970s, the fixed interest problems of 2006 and the banking crisis of 2007. Nothing, not even houses, is safe from turmoil.
Better to buy a share in a range of assets than to be in the wrong place at the wrong time.
Sorting out your financial plan for retirement is easy if you view it as a logical process. Obtain the information, ask the right questions and be realistic about how much you have and what inflation is likely to do to your future income. If necessary, consider delaying retirement. You are likely to live longer in retirement than you ever thought possible so again be realistic, you need to plan for an increasing income and possibly the need to pay for care should you become frail. Sustainable income is best achieved by a mix of assets.
If you need assistance with some of the detail and can afford professional help, book yourself on a pre-retirement workshop. It will help you plan your income and also help you to embrace your new life.
Jan Oliff
More Information
Jan Oliff founded Oliff Associates financial planners and IFAs in 1992.
Find out more: www.oliff.info
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