Everyone wants a comfortable retirement, but not everyone has planned for it. How can the baby boomers make the best of their twilight years, asks Maria Espadinha?
An individual approaching a well-planned retirement should be happy and feeling accomplished. The working hard days are over, with more time for loved ones, activities and hobbies that they always wanted to pursue but never had a chance. They saved up enough and planned for the years to come, probably with leg room for some indulgencies.
Nevertheless, recent research showed that financial advisers are finding their clients are worried about running out of money and concerned that they won’t be able to have their chosen later life lifestyle.
The problem has been exacerbated by pension freedoms, introduced in 2015, explained Helen Morrissey, pension specialist at Royal London.
The new rules
The new rules “have introduced so much choice for today’s retirees and it’s understandable that many people will feel cautious about navigating these options,” she said.
She added: “Advisers will raise issues such as how much money a client needs to meet their retirement expectations and how much risk they need to take – these are important questions that the client may not have considered before.”
Figures from the Financial Conduct Authority show around 600,000 pension pots are being accessed each year.
Seven in 10 savers accessing pension money for the first time are aged less than 64 and nearly two-thirds of funds accessed are valued at less than £30,000.
Adrian Boulding, director of retirement strategy Dunstan Thomas, noted that this excessive caution is due to human nature, as “we fear loss much more than we celebrate success”.
He said this worry manifests itself in retirement with a fear of running out of money, “and knowing that by the time we do run out it will be far too late to earn any more money”.
If your client has not travelled the world, wined and dined on the best cuisines and enjoyed the finest that art and culture has to offer in the first half of retirement, it may be too late by their later years — Adrian Boulding, Dunstan Thomas
He noted that the average retirement will last around 24 years and of those, the first dozen years will be in good health and the second dozen in poor health.
He said: “If your client has not travelled the world, wined and dined on the best cuisines and enjoyed the finest that art and culture has to offer in the first half of retirement, it may be too late by their later years.”
So how can advisers ensure that their clients can enjoy their retirement?
Ms Morrissey argued that this can be tackled by “helping clients to build a sustainable retirement income plan with regular reviews to tweak the plan as needed”.
She said: “For instance, a client in income drawdown may need to reduce or increase the amount they take from their pension over time due to market volatility or a change in their circumstances.
“These regular reviews are vital in making sure retirees remain on track and don’t risk running out of money.”
Afford the things they like to do
Fiona Tait, technical director at Intelligent Pensions, said that this is one of the most satisfying aspects of a financial adviser’s job: to shown the client that “they can afford to do the things they’d like to, and still have enough money to support their regular income needs over time”.
The best way to achieve this is with a personal cash-flow plan which looks at essential expenses and lifestyle spending, and is based on a holistic view of all the client’s relevant assets, she noted.
She said: “A good cash-flow model provides a picture for the client and gives them a realistic idea of how much income they can afford to take and how long it is likely to last.
“This in turn helps to manage expectations, both for clients who are over-cautious and those who are spending too quickly.”
Mr Boulding explained that a good approach for an adviser to help their clients is to divide their needs in three parts – which he calls essential income, lifestyle income and legacy aspirations.
He said: “The essential income can sensibly be covered off with secure pensions and investments, and for the lifestyle income, where the client could cut back in a downturn, a degree of risk can be tolerated.
“Thinking separately about the legacy aspirations will help not just with appropriate investments but also with thinking about timing – bequests shouldn’t all be left until the point of death.”
However, there isn’t a one-fits-all solution for a saver to avoid running out of money in retirement.
William Burrows, retirement director at Better Retirement, said that advisers will recommend their clients a solution which will meet their income needs without taking undue risks.
He said: “This may involve a combination of flexible income (drawdown) and guaranteed income (annuities).
“Drawdown will probably need active management and regular reviews to make sure the plan remains on target and sequence of risks is managed properly.”
I would expect a blend of secured and flexible income to be ideal for most — Paul Stocks, financial services director, Dobson & Hodge
Paul Stocks, financial services director at Dobson & Hodge, agrees with this view.
He said: “Everyone is unique, however I would expect a blend of secured and flexible income to be ideal for most, alongside an expectation of how needs and wants will vary during retirement.
“Ignoring care fees for a moment, most clients assume ‘peak expenditure’ to occur from retirement until 75, perhaps 80, and therefore the importance is of aiming to have, as a minimum, their ‘needs’ covered for the rest of their lives once ‘peak spending’ has passed.
“Add in to that cash flow forecasting (as the expectation), asset forecasting (as evidence of potential portfolio behaviour), some wriggle room and also a secured income, and I like to think clients can be directed towards comfortable retirements.”
Maria Espadinha is senior reporter of Financial Adviser and FTAdviser