Although not everyone likes the word retirement and I think most people want to be free to stop working on their terms and in their time. But whether you retire on your own terms or not, retirement is not going to be any fun without the funds in place to properly enjoy it!
In most cases, when we retire we’ll have a pot of money (Pensions, ISAs, Properties etc) that has to last us for the rest of our life. We need to manage how we take an income from the pot to make sure it doesn’t run out. Too much too soon and we’ll end up with an empty pot later in life; too little at the beginning of retirement, and we might have more then we can spend as we get older and possibly less able.
There are some things you can do yourself to give you the best chance of making sure your retirement income lasts, for instance:
Make sure you’ve got as much money in your retirement pot as possible in the first place, either by starting to save early enough or by putting away a suitable amount per month as you get closer to retirement.
Or you could shorten the length of your retirement, by taking up smoking, drinking substantially more or taking up ever increasingly dangerous sports.
So maybe these aren’t all particularly sensible so if you’d rather not actively reduce the length of your retirement then your financial advisor should be able to help you plan to make sure your income lasts.
At the core of this planning should be a proper cash flow plan to give you a realistic income that your fund will be able to stand. This is often drawn on a monthly basis giving you a sort of salary, much as you might have been used to when you were working.
Behind this, as your financial advisor, I will be working to make sure the income you’re taking doesn’t reduce the pot so much that the residue is unable to continue providing the income. I’ll also be making sure your portfolio well invested.
One area I consider as part of this is sequence risk, which isn’t something that many people outside the financial world will have come across. In simple terms sequence risk is when a carefully planned strategy to preserve your capital long enough whilst taking an income is ruined because returns from investment don’t come in the right order.
When you’re drawing income from a portfolio it is not just the average return that counts but the order in which your returns come. If poor returns occur early in the period in which you’re drawing your pension it can have big implications.
What does this mean? It means when we come to drawing income from your pension we have to think slightly different and focus even more on Winning by Not Losing which will help to reduce the risk of sequencing risk and this is something I factor into the way I invest for my clients.
Jon Doyle is Founder and Financial Planner at Juniper Wealth Management. Advising clients since 2008 he has guided clients through good time, bad times and the ugly. With a clear vision on how advice should be delivered and strong opinions on how we should be investing money in order to live the life we want to live free from money worry.