Investing in retirement
When you give up work, you’ll want to know that your hard-earned savings will take care of all your needs throughout your whole retirement. There are lots of things to consider if you want to make sure your savings last as long as you do. Here we run through some things to think about.
Important information - please keep in mind that the value of investments can go down as well as up, so you may get back less than you invest. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
Ensuring your savings last
A double challenge: inflation and longevity
It’s important to understand the challenges you face in making the most of your retirement pot – nobody wants to run out of money before they die. Living longer means your savings need to stretch that much further.
Today, most 65-year olds can expect to live a further 20 years on average – but many will live far beyond this. That’s why it makes sense to plan for 25 years or more in retirement. Over this time, inflation will eat into the value of your savings. Even a low inflation rate will reduce the purchasing power of your money. This chart shows you how the effects of inflation mean you'll be spending more in the future to maintain your buying power today. For example, buying a car for £25,000 today would cost you £41,015 in 25 years' time at 2% inflation.
So, if you want your income to maintain its buying power over time, it’ll need to increase in line with the rising cost of living. This means you’ll need to earn a return on your money. The good news is, there are ways you could inflation-proof your savings - although there are no guarantees. We’ve suggested some approaches to investing your money which could work for you.
Think about your withdrawal rate
One of the biggest factors affecting how long your pension pot lasts is how much you take out of it – and how often these payments are. If your only source of income is your pension, the aim would normally be to withdraw enough so that your income is maximised while ensuring your money doesn’t run out too soon.
Fidelity has created the global Retirement Savings Guidelines that provide a set of simple 'rules of thumb'. This research looks at how much income you should take so that it lasts for your whole life. It suggests that a level of income of between 4% and 5% per annum from age 65 is likely to be sustainable in the long term. This rate is based on the income rising with inflation (assumed to be 2% a year). But this is only a broad rule because every situation is different and how long your money lasts will also be dependent on the investment returns you achieve; you should review this regularly and consider adjusting your income in line with market fluctuations.
The graphic below indicates what this might mean. It is based on a couple aged 68 planning to retire with £180,000 of retirement savings taking an income worth 4.1%. It shows how they need to withdraw more each year so their income keeps up with the cost of inflation at 2%. Read the full assumptions our research is based on.
How we do our retirement saving guidelines calculations
The rules of thumb do not take into account the product that your savings are in - whether you are saving in an ISA, or a pension, or anything else. In particular, this means that it does not take into account limitations or tax treatments of individual investment products. In particular:
- It does not take into account the Lifetime Allowance on the overall value of your pension savings.
- It does not take into account the Annual Allowance or Earnings Cap limiting the amount that you can contribute to a pension.
- It does not take into account tax relief on pension contributions, or any additional tax due on the income taken from those pensions.
The rules of thumb are based on an assumption that people invest in a diverse portfolio of different assets including some stocks and some bonds. Your own investments might carry more or less risk than what we have assumed, which will change your expectation of returns. In particular, if you have a high proportion of investments in a single business or property, our forecasting assumptions are unlikely to be relevant.
The rules of thumb presented in this article are based on a set of generic long-term assumptions for investment returns because we do not know when in the future you might be retiring. It does not take into account our current view of potential investment returns in the short term, and therefore if you are within a few years of retirement these rules of thumb are likely to be less appropriate for you. If you are close to retirement and want to understand more about your potential retirement income using drawdown or an annuity.
- We assume that prices rise at 2% each year - meaning that the income you take must also increase at the same rate to avoid a drop in your spending power over time.
- We assume that you have a life expectancy based on ONS National Life Tables; your actual life expectancy will vary depending on your age, your gender and whether we are planning on a joint basis or for an individual.
- We assume that you invest in a mixed portfolio of investments. We can provide more information about the underlying assumptions in the Detailed Investment Assumptions section below.
- We assume that household income is gross annual income (i.e. before tax).
There are two ways of generating an income from your retirement savings - purchasing an annuity, or drawing down from capital. This article is about what income you could potentially sustain, based on certain assumptions, if you choose to draw down. This means that you are taking a small amount of money out of your savings each year to provide yourself with an income, while the balance of your savings remains invested. There is a risk that you could take an income that is too high - and so run out of money before you die - that will depend on how much you take, and how your savings perform in retirement. We need to forecast how your savings might perform in retirement - see investment assumptions below.
Note that this analysis does not take into account the limitations or tax treatments of individual investment products, such as your tax free cash lump sum, or the tax due on any remaining income.
Detailed Investment Assumptions
- We assume that you invest in a portfolio containing 25% equities.
- In order to select an investment return for your investments before retirement, we ran a forecast looking at the potential range of different results this portfolio might get and how likely they are. From this range of results, we chose an outcome that you could expect to see 80% of the time or more based on the assumptions used in the forecast - under this scenario, your investments are assumed to grow at an average rate of 4.75% each year (or 2.75% above inflation) over those 43 years before you retire.
- In order to select an investment return for your investments after you retire: we ran a forecast looking at the potential range of different results this portfolio might get and how likely they are. From this range of results, we chose an outcome that you could expect to see 90% of the time or more based on the assumptions used in the forecast - under this scenario, your investments are assumed to grow at an average rate of 4% each year (or 2% above inflation) for the rest of your life.
Estimate your retirement income
If you want to know how much income your pension pot could generate, try our Retirement Income Estimator tool.
Withdrawing from capital
The basis of a retirement fund is that growth and income from investments can create enough sustainable income to pay for your lifestyle. Yet many people want - and need - to spend their pot in their retirement; after all, that is what it’s there for.
If you only ever took the income generated naturally by investments, or equivalent to the growth in your fund, the pot would probably last far longer than you do - but is that what you want? For people whose only source of income is their pension, the aim would normally be to withdraw enough that your income is maximised, but that your money won’t run out too soon.
Regularly reviewing the performance of your investments will help you manage the sustainability of your income.
Ready to chat?
Call us now to book a free no obligation appointment with one of our retirement specialists on 0800 368 6882. We’re available Monday to Friday from 9am to 5pm.
The Government's Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance over the telephone on 0800 138 3944 or online.
Important information - Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not normally be possible until you reach age 55. Pension and retirement planning can be complex, so if you are unsure about the suitability of a pension investment, retirement service or any action you need to take, please contact Fidelity’s Retirement Service on 0800 368 6882 or refer to an authorised financial adviser.