Later Life

Best laid plans

6th February 2018
"When it comes to retirement income, does anyone really know what tomorrow may bring?"

I hope you your family and friends have avoided the flu strain that has been doing the rounds over the winter. I have met several acquaintances who were basically laid out by it for several days.

The worse case was a very fit 27-year old who was moving home. He had so much to do he just soldiered on until the virus got the better of him resulting in him being taken into hospital to be stabilised.

He had his move planned, van hire arranged and friends in place to help him. But if he was not there, in his mind, his plans would have fallen to pieces. Unfortunately by ignoring nature his plans fell apart. Fortunately friends and family rallied around and made sure all the ‘must do’ jobs were completed on time.

In that spirit, when it comes to retirement income, does anyone really know what tomorrow may bring? Let’s take a look back before the days of Pension Freedoms. People retired with insufficient pension savings, placed their tax-free cash on deposit, drew it down and carried on spending as normal. It disappeared, their annuity income was insufficient to live off and debts began to mount.

Then they looked at their housing wealth. No plan, just going through life reacting to circumstances, as most people do.

What pension freedoms did was enable those with insufficient pension savings to take control of their retirement income. Could they aim for their pension income to last them for a fixed period, say 10 years, and then use their housing wealth? Is it that the correct strategy? If they decide to downsize should they move early and live off the downsized proceeds, before calling upon their pension savings? If they are going to use equity release should they take an opposite strategy?

Whichever plan they undertake, they should ensure that their investment strategies are aligned. As can be seen by our 27-year old house mover, the best laid plans can be blown off course with no warning.

Retirement is not the end of life. In fact a large number will still have close to a third of their life to come. Some of the things that can blow a retirement income strategy off course are:

    Receipt of a windfall – Very few will experience a significant lottery win. However, more and more are receiving inheritances in retirement. If someone on benefits receives a sum of over £10k that could detrimentally affect their income. For others a greater lump sum may mean they might wish to suspend their pension income for a period. If they had released equity from their home, depending upon their objectives, would they wish to repay some or the entire outstanding amount borrowed?

Large reduction in wealth - I am not talking a drop in value of investments or house prices, after a market correction. Also, I would hope that clients are insured against accidental damage, fire and theft to the property they own. Retirement is such a disruptor to life, often one or both in a marriage cannot cope with the changes, resulting in a divorce. Divorce destroys wealth. From a financial point of view there are no winners. It costs a lot more for two to live apart than it costs to live together. Also a lot of wealth can be destroyed. The best example of this in retirement is the surrender or part surrender of guaranteed income. Divorce in retirement often means starting a retirement income strategy all over again.

Partner or someone close requiring care - There are over two million unpaid carers in the UK. Roughly 6% of the population between age 55 and 85 spend more than 20 hours a week as an unpaid carer. When someone begins to need care, and for how long is not predictable, but if care has to be provided at home or in a care home it will have a significant impact on the household spending.

Partner or someone close dying - Again this will be another disruptor to the household income and spending plans.

In the above I have not covered changes to the individual’s lifestyle, due to changes in health, energy or mobility or the possibility of them having to be cared for.

The problem with the above is that some of the things I mention may not ever occur and those that do are unpredictable. There is no such thing therefore as an average retirement. What people need is a good retirement financial planner who can help people plan for the above eventualities should they occur and help them avoid making costly errors when they do.

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