Many of us are living longer these days, and that can only mean one thing – retirements are getting longer, too! While this is of course a good thing, it can sometimes put extra pressure on your finances. So just how will you fund a lengthy retirement?
Let's start by looking at how much you could need. Research from Prudential has found that people retiring in 2014 have an expected retirement income of £15,800, while the typical retirement now lasts nearly 20 years (analysis of life expectancy data found that those turning 65 this year can expect to live to nearly 85 years old).
This is just an average, so a large number of retirees could live significantly longer, which could well put pressure on their pension pots.
According to Prudential's calculations, someone seeking a retirement income of £15,800 would need a pension pot of approximately £121,000 to secure that income for 20 years, made up of income drawdown and the State Pension. However, this rises to a pot of £139,000 to fund a retirement of 25 years, while someone enjoying a 30-year retirement will need a pot of £154,000 just to maintain their standard of living.
"These new figures underline the importance of making retirement income decisions that address the risk of outliving savings," said Vince Smith-Hughes of Prudential.
"The changes to pensions, savings and the rules around taking a retirement income that were announced in the Budget in March are good news for savers and retirees because they now have more choice, [but] if retirees choose to draw income directly from their pension fund, they need to consider if it's sustainable to take that level of income over an extended number of years."
It's vital to prepare for the prospect that you'll live a lot longer than expected. Of course, hopefully you will, but if you ran out of money, then those extra years may not be the most comfortable!
Not only do you need to make sure you've built up enough savings to last for a significant length of time, but you need to decide how you'll spend that pot to generate the most benefit. Will you opt for income drawdown, buy an annuity, or withdraw the lot and make your own investment decisions? It's entirely up to you, but given the importance of the decision, you may want to think about seeking professional advice to help you find the most suitable course of action.
Don't think that the State Pension will be a good alternative either, as Mr Smith-Hughes warns: "It is important for people not to overestimate the value of the State Pension as a fallback should they exhaust their retirement pot. The State Pension alone is well below the income level most people estimate they'll need for a comfortable retirement."
Although you'll of course want to include the State Pension in your retirement income calculations, for many people – especially those that have higher income expectations – it should be seen as a supplement rather than the sole form of income. It invariably won't be enough to give you the retirement you want, so you'll want to have income from other areas, too.
That's why it's so important to start saving as much as possible from an early age, thereby ensuring you're left with the pension pot you need. Saving into an ISA will always be a worthwhile endeavour, as any interest you earn will be entirely tax-free – a great way to grow your retirement fund – but contributing to a workplace pension should be high on your list of priorities, too.
Happily, it seems that a large proportion of working-age people understand the benefits of doing so. In fact, research from the Department for Work and Pensions (DWP) has found that saving into a workplace pension is becoming a "social norm", with three-quarters of the population now aware of automatic enrolment and four million people now paying into such schemes.
Furthermore, almost half of those surveyed agreed that saving into a workplace pension is "the normal thing to do", while 78% of people believe that employers being legally required to automatically enrol their staff is a good thing. These are encouraging findings, particularly as there's still a lot of work to be done – almost half of working age people still fail to save enough to maintain their standard of living in old age, so the fact that more and more people are realising the importance of saving hopefully means that things will change in the future.
It's all about being prepared, and if you're proactive in your retirement saving – and think carefully about how you'll spend your pot when the time comes – you can easily fund a longer retirement to give you the standard of living you're hoping for.
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