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Retirement – running out of money

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You’re hoping to retire in the near future but, understandingly given the historic low level of interest rates, are not attracted to annuities for your pension pot. So how can you ensure you can make your pension pot, and other savings and investments, last as long as you do?

The challenge is you don’t know how long you have to make your money last as it is difficult to predict when you’re going to “shuffle off this mortal coil”. The average age of death in the UK is about 79 for a man and 82 for a woman, however, these are just averages. There is a one in three chance you will live to 90 – last year 14,500 people made it to 100.

The benefit of annuities is that they are guaranteed to last as long as you – the annuity provider assumes the risk of your longevity. Don’t buy an annuity and this is a risk you have to manage, but how?

To make prudent financial planning decisions the central question to consider is what you want out of life and where money fits into that – to have an idea of your income and capital requirements during your retirement.

One approach is to project your yearly cash flow and wealth until age 100. Such cash-flow modelling will undoubtedly transpire to be wrong and therefore will need to be regularly (at least annually) reviewed, updated and refined so you can make any corrections well before you encounter any problems. A simple lifetime cash-flow projection can be done by yourself using a spreadsheet and there are a few online tools that can provide basic projections.

When you’ve established what you need each year to cover your basic cost of living, consider discretionary expenditure e.g. holidays, hobbies etc. What lifetime incomes will you receive e.g. company pension schemes and the state pension – when are they payable? Create a valuation of all your assets, particularly noting those that could be used to generate an income. At this point you’ll have to make certain assumptions concerning inflation and future investment returns. Include these in your cash-flow projection and create different scenarios based on different assumptions.

The true value of creating a lifetime cash-flow is to get you thinking about your long-term future and the lifestyle you want given your available resources. To quote Benjamin Franklin, “by failing to prepare you are preparing to fail” – or at least, in this context, running the risk of future money worries and problems.

Then comes the task of how to invest your assets to provide you with the means to achieve the lifestyle you want – a subject for a future article.

Author: Paul Newton FPFS, Certs PFS (DM & Securities), Certs CII (MP & ER), STEP Affiliate, Cert PMI is a Chartered Financial Planner for Castlegate Financial Management Limited, a firm of Independent Financial Advisers, authorised and regulated by the Financial Conduct Authority. 8 Castlegate Grantham Lincolnshire. 01476 591022. This article is for information purposes only and does not constitute financial advice which should be sought before any action taken.

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