Many people assume that retirement planning is something that can only be done before retirement. In practice, there are ongoing decisions that still need to be made long after retirement begins. Income sources, spending requirements, health, and market conditions can all change over time, and these changes can interact in ways that are not always obvious. A modelling tool can help explore how these factors interact over the long term.
If a retiree wishes to model their post-retirement finances, the model may need to take into account a range of factors, such as:
• Ongoing income: State pension, defined benefit pensions, existing lifetime annuities, part-time earnings, and other income sources.
• Pension pots and drawdown: Defined contribution balances and any planned or ongoing drawdown levels.
• Spending patterns: Essential spending, discretionary spending, and the degree of flexibility between the two.
• Assets and liabilities: Cash reserves, investments, properties, and debts.
• Personal circumstances: Life expectancy assumptions, risk tolerance, and the importance of leaving a legacy.
If the retiree is in a couple, the model would need to take both partners into account. In some cases, one partner may be retired while the other is still working.
Before retirement, financial planning focuses on accumulation. Net worth typically increases as savings grow, although someone with a generous defined benefit pension may be accumulating future income rather than assets.
After retirement, the focus shifts to sustainability. A retiree may receive the state pension and other guaranteed income, but if these do not fully cover spending, the remainder must be supported by drawing down accumulated investments.
For anyone relying on investment drawdown, market volatility has a direct impact on long-term sustainability. Flexibility in discretionary spending becomes an important factor, and uncertainty around longevity adds further complexity. A model needs to represent these uncertainties rather than assuming fixed outcomes.
As investments are drawn down (whether from defined contribution pension pots, ISAs, or other accounts), future returns are uncertain. A Monte Carlo approach helps explore a wide range of possible outcomes and how they might affect sustainability over time.
EvolveMyRetirement supports ongoing flexibility during retirement rather than simply evaluating decisions that have already been made. Existing assets, liabilities, income sources, essential spending, life insurance policies, and any expected inheritances can all be entered into the model. The model also allows for planning around uncertain future costs, such as long-term care.
Some inputs that might appear to be fixed are instead treated as part of the strategy. Rather than entering these directly, users specify attitudes and preferences such as risk aversion and the importance of leaving a legacy. Strategy elements include:
• Discretionary spending.
• Investment risk and rebalancing.
• Drawdown levels from pension pots.
• Possible future use of investment assets to buy lifetime annuities.
These strategy settings are generated using an optimisation technique that combines Monte Carlo simulation with a Genetic Algorithm. The generated strategy is not fixed; users can adjust inputs, regenerate the strategy, and explore how different assumptions affect the results. Paying subscribers can also directly edit the strategy settings. The outcomes are presented in a clear format, allowing users to examine alternative scenarios and understand how their finances might evolve over time.
Using the analysis tools provided by EvolveMyRetirement, users can explore a range of post-retirement scenarios. These include examining how different drawdown patterns affect long-term sustainability, assessing the impact of inflation on future spending, and understanding how market volatility influences investment longevity. Users can also consider the effect of changing discretionary spending, model the impact of starting or stopping part-time income, and evaluate how a future lump-sum expense might affect their finances.
Any post-retirement model relies on assumptions about future investment returns, inflation, and longevity. These assumptions are uncertain, and real-world outcomes may differ from those explored in the model. Monte Carlo simulation helps illustrate a range of possible futures, but it cannot predict specific results.
The model also depends on the information entered by the user. Changes in income, spending, health, or market conditions may require updates to keep the model aligned with current circumstances. Users who require personalised guidance may wish to consult a qualified financial professional.
