How to never run out of money in retirement

A retiree’s greatest fear may well be outliving her savings. Unfortunately, more than 28% of retirees across the country currently face this harsh reality (Rozi Jones, Financial Reporter, 13th July 2018). According to the Pensions Policy Institute, uncertainties about life expectancy, inflation and expected returns on investments make retirement planning too complex for the ordinary saver. With rising life expectancy and record-low interest rates, these complexities are magnified.

Furthermore, recently introduced pension freedoms rules mean millions of people taking up to 100% of their defined contribution pension savings at retirement could be at increased risk of outliving their pension pots (Sarah O'Grady, Express, Apr 13, 2018).

With this in mind, savers need to start considering ways to sustain their retirement nest eggs for longer. Here are some of the ways you can outlive your savings:

Test-drive your budget

Absolutely nothing beats practical experience. Your expectations of retired life could change if you take a few months to live on the amount of money you’ve chalked into your budget. Testing your assumptions will help you make your long-term plan more realistic.

Make realistic assumptions.

Another key pillar of effective retirement planning is to make realistic assumptions. Take the time to objectively study your country’s economic conditions, your household expenses, and the basic expectations of your loved ones. Always assume your assets will earn the average rate of return and inflation will gradually erode your spending power.

The best way to make your plan more realistic is to build in a margin of safety with each assumption. This could simply mean expecting less than average returns and more than average expenses over a long time horizon. In other words, assume inflation will be higher than it is now (2.7%), you’ll live longer than the average person (82.9 years for women and 79.2 for men), and you’ll earn less on savings than retirees do at the moment (3% to 4% in income funds).

Consider the tax bills

Prematurely withdrawing cash from your retirement account negatively impacts your finances in three critical ways - it shrinks your nest eggs right away, reduces the effects of long-term compounding, and may have tax implications. Only the first quarter of any sum you withdraw will be tax-free, with the remaining amount taxed at your individual marginal rate. These one time tax bills can have amplified effects on your retirement.

Have a plan B

As with any plan, a contingency is always a great idea. Consider ways to generate income in retirement such as renting out a bedroom temporarily, teaching young students the skills you picked up over the course of your career, or selling artwork online. Even marginally boosting your income in retirement could significantly increase your chances of never running out of money.

The value of investments and income from them may go down as well as up and you may not get back the original amount invested.

Information is based on our current understanding of taxation legislation and regulations which is subject to change