“Received wisdom suggests that many people may need to retire later to compensate for declining pension returns. This is to compensate for declining pension returns. On the face of it, this can sound reasonable. As an idea within a cash‑flow model, it can be explored.
However recent government statistics shows an interesting fact. For the first quarter of 2016, the employment rate for those aged 65+ is about 10%. That’s slightly down from the previous year. There seems to be a very long way to go from current reality to the direction suggested by recent policy trends. That is, a situation in which the majority of us work into our late 60’s or beyond. There are several reasons for this, including:
- Redundancy could force us back into the labour market. It could be at a time when we no longer have the motivation and drive to find employment. Let alone well-paid employment.
- Our health, mobility or stamina may decline. At some point, work could be impossible or impractical.
- We’re not all lucky enough to love our job. We may reach a point where losing the income is preferable to continuing with a job we hate. It may be too late to retrain for a completely new career. We may need to devote large chunks of our time to caring for an elderly or sick relative. Or we may need to provide childcare support to grandchildren.
Of course none of these scenarios may come to fruition. But planning to work to 75 when you’re now 50 (for example) may be an optimistic assumption. It can be more cautious to model an earlier retirement rather than a later one. If spending is based on assumptions about working into old age, and those assumptions don’t materialise, retirement savings may be affected.
Even if someone wishes to work much longer, a cash flow model can instead assume that work may not be possible. As we approach our originally planned retirement age, the plan can then be adjusted gradually as circumstances become clearer. Closer to the time, the model can incorporate a later retirement if desired, and discretionary spending can be adjusted accordingly.