DIY retirement?

"What if at the same time the value of their underlying wealth reduces indicating they should take smaller withdrawals? A perfect storm could be coming down the line for some."

What should have been a half-hour job took several days and a lot of time to satisfactorily resolve. Doing it myself cost a little more than it should have done, buying the parts I should have not needed. It cost a large amount in time, stress and annoyance. Overall, in money terms it was still a lot cheaper than calling out a plumber.

Similarly, many people do their retirement themselves. What could go wrong?

Just look at the economic headlines we could soon be seeing. Let us look at some of those headlines. Inflation is the retirees’ number one enemy. It erodes the value of assets and increases the amount that needs to be spent on essentials - food, energy including fuel and clothing.

Government debt, actions by Governments to keep the economy going following the financial crisis and during the pandemic, have led to large amounts of debt and the use of Quantitative Easing. How will Governments and Central Banks get their balance sheets back to some sort of normality?

What will be the effect of those actions on interest rates, inflation, and the price of assets such as houses, bonds and equities?

Then there is the general economy. In the UK the date at which the economy will return to its pre-pandemic level of activity is slipping. The forecast is now early 2022. But that means GDP will be about 3% lower than would have been expected at the beginning of 2020.

In normal times, a period of two years resulting in trend growth being 3% lower than expected would begin to raise eyebrows. What we don’t know is the long-term damage done to the underlying economy.

Policymakers will have to be expert economic plumbers to get the balance right. A policy that moves too fast in one direction could cause serious implications elsewhere.

The do-it-yourself retiree on the other hand will have to react to the consequences of those policy decisions. Can they afford to increase spending to offset the impacts of inflation on their day-to-day living? What if at the same time the value of their underlying wealth reduces indicating they should take smaller withdrawals? A perfect storm could be coming down the line for some.

It is not just those who are retiring today who will be impacted by some of the things that could happen.

Before the introduction of Pension Freedoms in 2015 almost all those who retired converted their pensions to an annuity. How many of them took advice? How many went for the highest income which did not include any increases let alone inflation protection? How many have left their spouse unprotected should they die first?

Since 2015, most retirees have used Pension Drawdown. While not having a direct impact on income they are indirectly more exposed to the vagaries of the economy.

Going back to my DIY analogy. Often retirees when in need of additional funds downsize to release equity. After going through the expense of moving they take on an equity release plan to fund a house extension. The new smaller home has nowhere for the family to stay when they visit. A little like my plumbing escapades.

The next few years are going to be very volatile for retirees. The sensational headline writers may have a field day but behind the headlines are real people with problems who need help, guidance and advice.

There will be a lot of people who are going to need your skills to help correct DIY retirements that through no fault of their own have gone wrong.