Most retirement savers have worked out their cash needs on quitting work in reverse, according to new research.
The traditional way to work out how much income needed in retirement is to look at replacing around 75% of pre-retirement income from savings and pensions.
However, a new study from insurance and pensions giant Standard Life suggests financial advisers have got it wrong – and the reverse is true.
The research results show that most people need more money later in retirement rather than when they give up work.
Standard Life explains this is because people believe they need cash early on to fund holidays and activities before they become too old and frail to get out and about.
Retirement spending
However, Alastair Black, the firm’s head of customer income solutions, said that the real retirement spending pattern was completely at odds with that way of thinking.
“It’s over time when retirees are less healthy that they need the most money,” he said.
“As people tend to live longer, the spending pattern is like a smile. It starts high and dips before rising again. The increase is due to the rising costs of long-term nursing and health care. In fact, retirement income is not a straight line at all.”
Statistics show that someone retiring at 65 years old when the state pension was introduced in 1948 has a life expectancy of two years.
Someone returning at the same age now can expect to live another 20 years – and the figure is continually rising.
The traditional retirement funding concept is an annuity paying a fixed rate throughout someone’s later years.
Consider drawdown
Pensioners buy an annuity with their funds and receive a fixed income guaranteed until death, whereas drawdown keeps the fund invested and earning income that can be drawn against. Drawdown is variable and controlled by the retirement saver, so they can take as much or as little cash as they like each year.
But annuities are losing favour as rates fall disappointingly low.
Pension drawdown is becoming more popular. In the USA, most seniors go into drawdown rather than an annuity.
“Over a 20 or 30 year retirement, drawdown is a much more flexible way of managing income than a fixed annuity,” said Black. “When you consider the options, for most people, an invested pension that is still growing is probably a good idea.”
Black suggests the pension drawdown/annuity decision should be made at retirement with the help of professional investment advice.
