Most of us think of retirement planning as something we need to do long before we’re retired. And of course, that’s preferable, otherwise we might never find ourselves ready to retire. During our working lives, fresh earnings help with planning ahead. As long as we’re not on subsistence wages there are choices we need to make; and some choices are better than others for the long term.
But once you’ve retired, what planning is there left to do? Perhaps more than you might have thought.
Budgeting and spending
If you planned carefully before you retired, you should already have a reasonable handle on your essential spending. You should also have a reasonable estimate of your sustainable level of discretionary spending, especially if you’ve been using our Intelligent Retirement Calculator. But circumstances change. Investments go up and down. We grow older, perhaps with some health issues. Our aspirations evolve. Sticking rigidly to a spending plan from years earlier may not be the right thing to do.
The EvolveMyRetirement® philosophy is that each day is the first day of the rest of your life. Five years ago you might have quite reasonably assumed that long-term inflation would average at 2%. Let’s say you now think the average will be higher, but your discretionary spending is still based on 2%. Then you’re over-spending, other things being equal.
Minor changes in circumstances needn’t derail your spending plans. But major changes should cause you to take a fresh look.
Investment risk when retired
According to conventional wisdom, you should gradually reduce investment risk leading up to retirement. This is based on the assumption that once retired you’ll buy an annuity with your entire retirement funds. But since Pension Freedoms were introduced in 2015, annuities have fallen out of favour. Most people consider Pension Drawdown as their default source of retirement income. This assumes that your retirement fund remains invested until needed. But low-risk investments alone won’t generate more long-term sustainable income than an annuity.
So in order to benefit from drawdown, you’ll need to take some degree of investment risk, even after you’ve retired. The right amount of risk at a given point in time depends on a number of factors, such as:
- Your age, health and life expectancy.
- The size of your retirement fund.
- Anticipated inflation.
- The state of the economy and markets.
These and other assumptions will undoubtably have changed since before you retired. So periodically reviewing your investments and associated risk is essential throughout retirement.
When we touched on annuities earlier, we noted that they’ve become far less popular than before pension freedoms. The main reason for this has been the very low rates on offer. These were due to very low inflation and interest rates. But more recently inflation spiked, and interest rates rose dramatically, along with annuity rates. Annuities are once again worth considering seriously; not necessarily for all retirement income, but perhaps for just a part; and maybe not immediately, but maybe when you’re a bit older and annuity rates will be higher for you.
But the process of deciding if and when to buy annuities, and if so how much and what type, is highly complex. There a so many variables that sophisticated cash flow modelling is needed to get it right. Fortunately our own cash flow modelling tool has a built-in optimiser that takes possible annuity purchase into account. Optimisation may indicate that annuities are not right for you, but if they are then it should home in on the amount, type and timing.
Before you retired, you may have ruled out annuities as a possible contributor to your retirement income. But as circumstances change, it may well be that annuity purchase in some form could make the difference between a secure retirement and once fraught with risk.
Many people miss their work once they’ve retired. Part-time work isn’t for every retiree, but it can certainly provide a useful financial boost, as well as keeping one active. If you decide to work after retirement, factor this into your plan. All good things come to an end though, and you’ll need a realistic estimate of how many years you’ll be able to keep working part time. For early retirees, part-time earnings could substitute for the state pension before it kicks in. Beyond that, it would help delay or reduce drawdown, allowing your retirement fund to grow further. But it’s important not to simply treat the extra income as extra immediate spending money. Projected earnings should be amortised over your lifetime, just like pre-retirement earnings.
Retired finances are not static
As we’ve seen, a lot can and will change after you’ve retired. Hopefully the plan you make before retiring is resilient enough to cater for real-life events. But as time moves on, mere probabilities become certainties. For example projected inflation predicts price rises. But after inflation has had its effect, the starting point for actual spending will be higher, which you’ll need to factor into your future planning.
Planning after retirement is at least as important as planning beforehand. Luckily our retirement planning tool is designed to work whether the starting point is before or after retirement.