Two challenges face newly retired workers – filling all that extra time they have and dealing with finances that are not topped up a salary.
Retirement marks an about turn for many, as instead of concentrating on saving, they now have to look at their spending.
For some retirement savers, the past 30 years have involved finding money to save for when they give up work.
Now, they have finally past the post, they need to mentally switch to spending their savings and not running out of cash before they die.
So how much is sensible to take from a pension pot?
Finding your ‘sustainable withdrawal rate’
Financial advisers call the figure a sustainable withdrawal rate, and understanding how spending affects savings can help make sure savers put enough aside throughout their working life.
One of the key thinkers here is William Bengen. In 1994, Bengen published a paper suggesting taking 4% from pensions, savings and investments each year was safe.
He called the spending safe because earnings from the invested cash should replenish the pot at the same rate each year.
A pot of £250,000 could withstand the saver taking £10,000 a year over a 30-year retirement because this is the same amount the savings should generate in a year to keep the pot at the same value.
However, the 4% rule may have seemed adequate in the 1990s, but in the post downturn age of low interest rates and falling dividends, the figure may seem high.
Cash cushion to bolster finances
Another popular paper, from financial thinker Michael Kitces, indicates 4.4% is an optimum withdrawal rate with a retirement fund divided 60:40 in favour of equities against bonds.
Many financial advisers regard managing retirement finances is more important now than ever.
Market turmoil can quickly increase or deplete savings, and the likelihood is many retiring now need a plumper cash cushion to bolster their finances if they want them to last for 30 years or more.
When to retire is also a tough question – set the date for a bear market and financial plans will go awry, while choosing a bull market could mean things could go a lot easier.
