December 10th, 2020

How you can avoid running out of money in retirement

One of the most common questions our clients ask us is: “What are the chances of me running out of money in retirement?” This is a serious concern for many people, but there are steps you can take.

According to a recent study by Aviva, more than half of Brits are worried about their financial prospects in retirement. If you’re one of them, read on for some tips on how you can avoid running out of money in retirement.

The ‘4% rule’ may no longer be a sustainable rate of withdrawal

For many years, the generally accepted rule of thumb for pension withdrawals has been the ‘4% rule’. As the name would suggest, this rule stated that withdrawing 4% of the value of your pension each year was a sustainable amount.

However, newer studies suggest that considering modern market conditions, this amount is not as sustainable as it was back in the 90s when it was first proposed.

Part of the problem is that pensioners tend to live longer than they did previously, which means that pension funds need to last for longer. Ultra-low interest rates on government bonds, which typically make up a sizeable portion of many retirees’ assets, have also reduced the growth of many pension funds.

The Times reports that, according to recent market analysis, pensioners sticking to the 4% rule are three times more likely to run out of money in retirement than they would have been just ten years ago.

Retirement should be a time to relax and enjoy the rewards of a lifetime of hard work, so if you’re concerned that you might not have enough to last you throughout retirement, here are a few things you can do.

Maximise your pension contributions while you can

If you’re worried about depleting your pension fund in retirement, the first and most obvious thing you can do is to make sure you’ve maximised your contributions during your working life.

There are many ways you can increase your pension contributions, such as by using a pay rise as an opportunity to save more. However, if you have a workplace pension scheme, one of the best things you can do is making sure that you’re maximising your employer contributions.

The minimum contribution in a workplace pension scheme is 8% of your salary, of which you pay 5% and your employer pays the remaining 3%. However, some employers are willing to increase their contribution when you increase your own, up to a point.

While not all employers offer this, it might be worth talking to your boss to see if your workplace offers this, as it can provide an easy and valuable boost to your contributions.

Additionally, your State Pension is likely to make up a significant portion of your income in retirement, so it is vital that you make sure that you can claim as much as you can.

To be eligible for the full State Pension, you will have to have paid 35 years’ worth of National Insurance contributions. If there are gaps in your record, such as time spent out of work, you can apply for National Insurance credits to make up for them.

If you may need to apply for these credits, you can head to the government website to find out if you’re eligible.

Find a rate of withdrawal that is sustainable for you

As we mentioned earlier, drawing down 4% of your pension each year might no longer be sustainable. So, if you want to stop yourself from running out of money in retirement, you will need to find a withdrawal rate that is right for you.

Finding the right withdrawal rate is a balancing act between maintaining a comfortable lifestyle and taking sustainable withdrawals, so this amount will be different for everyone. If you’re concerned about your pension running out, it is best to err on the side of caution.

According to data from the Association of British Insurers, reported in FT Adviser, using a withdrawal rate of 3.5% will give you a 95% chance of not exhausting your savings in retirement. Other studies, such as the recently published analysis by LCP, suggest that a withdrawal rate of 3% might be more appropriate.

If you’re unsure of what rate would be sustainable for you, speak to a financial adviser for advice.

Speak to a financial adviser

There are many factors to consider when calculating the right rate of withdrawal for you. Since it can be crucial for ensuring that you don’t run out of money in retirement, you may benefit from speaking to a financial adviser.

According to market analysis provided by data analyst Moneyfacts, individuals who did not take advice typically made larger withdrawals as a percentage of their pension fund. This made them much more likely to deplete their pension funds during retirement.

Speaking to a financial adviser about your withdrawals can also give you peace of mind to know that your pension is being managed in the most effective way possible. It means you can enjoy your retirement safe in the knowledge that you’re able to do so in a comfortable and sustainable way.

Get in touch

If you’re concerned about running out of money in retirement, we can help. Email enquiries@prosserknowles.co.uk or click here to request a call back from one of our advisers.

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