Timing is everything when planning for retirement
“In this world nothing can be said to be certain, except death and taxes.’’
Benjamin Franklin wrote that more than 200 years ago, perhaps when he was thinking about his pension.
For death and taxes are two certainties that have to be borne in mind when planning for retirement. We go into detail on taxes elsewhere, explaining the importance of the reliefs available in phased drawdown and of making full use of personal income tax allowances. But, here we’ll explore the subject of timing and the importance of deciding how long your pension pot will realistically need to last and at what point the levels of income you need will start to taper off.
The infirmities of old age and death aren’t subjects people want to dwell upon, but it’s important that they are considered because a realistic pension plan needs an end date. To be blunt, you won’t live forever – and you can’t afford to anyway.
It’s also an inescapable truth that, as your retirement progresses, you’ll get older, you’ll become less active and your expenses will reduce. As people grow older, they eat less, they drink less, they go out less, and they spend less on travel, clothes and on children. The best years of your retirement, those during which you can get the most out of life, are the earlier ones. These are the years in which you take the world cruise, take that trip to see relatives in Australia, go out for meals or to the theatre, spend more time and money on your hobbies or buy a camper van to tour the country. So it makes sense that your retirement planning should direct more of your funds to this earlier period than to the later one.
The difficult part, of course, is in arriving at that end date. There are many factors to take into account. What’s your family’s record like? Have lots of your relatives received congratulatory telegrams from the Queen or have they shown a tendency to die young? Do any illnesses run in the family? What’s your own health like? Do you, or have you ever smoked? Do you drink to excess? Are you overweight? Do you exercise? Are you a woman? In which case, on average, you’re likely to live longer than a man. Even your postcode can be an indicator of your likely longevity. There are plenty of free life expectancy calculators on the internet that can help you with this. As a guide, on average, currently a 65-year-old man in the UK can expect to live to the age of 83 and a half, while a woman can look forward to surviving until she’s almost 86.
Obviously, you’re unlikely to get it exactly right, but you should be able to come up with a broadly realistic age. Then, you can work back from that and estimate for how many of your retirement years you’re likely to remain reasonably fit and healthy.
For example: you come from a reasonably healthy family and you’re in sound health yourself, so you think you have a good chance of making it to 85. On that basis, you hope to remain fit and active until you’re 75. So, depending on the size of your pension pot, you might plan for an annual income of £40,000 until you are 70, £30,000 until you’re 77 and £20,000 a year after that.
Once you’ve made these calculations and assumptions, you can take a view on when you can afford to retire.
The beauty of phased drawdown is that it gives you the flexibility to use your pension assets in this way, taking out the income you need, when you need it and in the most tax efficient way.
Of course, judging your own lifespan is far from being a science and with improvements in medical science, life expectancy has been increasing. So you should build into your plan some slack, weighting it towards staying active longer and living longer.
As always with retirement planning, constant review is crucial and, whatever those reviews throw up, phased drawdown gives you the ability to adjust to take account of changing health and circumstances.
It is important that no actions should be taken without first taking advice. Personal circumstances and an individual's appetite for risk means that the advice for one person may not be the same for everyone. The information in this blog or any response to comments should not be regarded as financial advice. Reeves do not advise on Defined Benefit pension schemes. Reeves do introduce a third party specialists in areas of work we do not cover. Please note: This article has been published with the use of a fictional character to outline a case study.