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Why you still need an income during retirement

| May 11, 2014

In this article I highlight some of the unforeseen problems that can be experienced in retirement. While you are in employment, the risk of this is low as you have a regular income and the occasional pay rise and also possibility to move to a better paying job. However, after retirement the lack of a regular income heightens income risk considerably

Future Concerns

Inflation

Also known as the cost of living, this doesn’t affect the amount of money you have, but how much goods your money can buy. See, the problem is, you may work out a savings plan based on the cost of today. i.e. by looking at your weekly shopping list you see that you are spending £75 a week. This includes basics like bread, milk, various toiletries etc.

Now imaging that in 30 years time, to purchase those same items on your list costs £150. Your savings plan has been totally blown out the window and your now in trouble You can only afford half of what you expected to live on or as alternative you will have to settle for equivalent cheaper products. Ultimately, you will have to readjust your lifestyle.

Property costs (especially if you are renting)

If you are still renting, will your monthly income in retirement enable you to live comfortably after paying rent and other costs such as council tax and energy costs?

Are you going to be able to build up a large enough retirement fund to pay rent and food costs – both of which may likely undergo problems of inflation as noted above. There is a balance to achieve and a decision to be made about your lifestyle in 20-40 years time – and that needs to be decided today.

If you are still renting at time of retirement – what options do you have if rental costs consume 70% of your retirement income. You may now be forced to move into shared accommodation in order to be able to afford life’s basic necessity.

Income Drawdown – Spending your savings

So given the above, your thinking your will save up a large retirement fund say £300,000.
The first question you really need to ask yourself is how long will this money have to last – in effect, when will I die.

If you can live on £10,000 a year – this will last 30 years. Given you retire at 60, you will be 90 years old by the time your run out of money. But this assumes costs do not change over 30 years. Just think back to how much today’s chocolate bars were just 15 years ago. Costs can easily double over this 30 year period, meaning your £300,000 may effectively only last 15-18 years. Unless you adjust your lifestyle downwards – spending less and going without – you will find yourself broke without means to change your circumstance.

At the age of 75-80 hopes of generating additional income is unlikely.

BTL properties Interest only, High LTV

The great saviour that now consumes the minds of many individuals – “I will use my property as my pension”.

Investment properties kept on Interest Only mortgages still require payment in order to generate an income. You should be aiming to reduce the mortgage to an affordable level in line with your retirement income. Do not expect to re-mortgage to a larger mortgage as the risk of a missed payment may cause problems and without employment income, the good old re-mortgage may not be possible.

Another concern is relying on tenants to always pay the rent. You should expect some missed payments and plan this into your retirement income.

Last but not least, the property market is subject to ups and downs. It maybe booming today, but what happens if that all changes. A property only plan for pension is deemed high risk if it is your only, or main form of retirement income.

Lifetime limit

The government is reducing the pension lifetime limit – meaning that (today) after putting £1.5m into your pension, you will need to find an alternative savings vehicle.

This amount may seem a lot today, but we are thinking about life in maybe 25-40 years time. Not so long ago, everyone wanted to be a millionaire – now its billionaire.

It is important to keep in mind that costs of normal day items will be increasing over your lifetime and your pension, once cashed out will not.

It is important not to think in terms of today’s prices, but in terms of what prices could be in the future. Failing to do this can lead to miscalculating the amount you truly need for the future.

Category: Investing, News

About the Author ()

Andrew, founder of the Final Salary website (FS), started the website soon after the government announced drastic changes to pension schemes in 2010 and the need for individuals to take more control of their financial future. As an avid reader of all things finance related, he decided to share his knowledge via this informative website. Andrew brings knowledge across many areas of business, retail and consumer finance.

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