We are often reminded that – in the words of a former UK prime minister, Benjamin Disraeli – “Change is inevitable. Change is constant”. And that has certainly been the case with regard to retirement planning as the increasing amount of time spent in retirement has coincided with some substantial changes in our expectations for life as a retiree, and as governments around the world have sought to update their pension regulations.
Despite this, many people don’t want to commit the time to plan ahead for their retirement, even in the final few years approaching the time they plan to stop working. After all, we are hardly the first generation to retire after a long career or having managed a successful company.
We highlight three changes that we think those coming up to retirement need to be aware of:
We all question how long we will live and a lot of factors affect the outcome. These can be known (such as your ancestry and lifestyle) or beyond your control and foresight (such as medical developments). And although we may not all underestimate how long we will live for (and lots do), we appreciate that the situation is challenging because we are planning for an undetermined period in life with a finite sum of money.
Given the number of unknowns, we believe it’s best to plan to the age of 100. While this is above average for current life expectancy levels, if you’re part of a couple (and it is estimated around 75% of people are) and between the ages of 60 and 65 years, there is a one in four chance that at least one of you will reach your centenary. If you’re younger than this, the chance one of you will reach that milestone is higher still. These are probabilities that need to be taken into account.
In addition, although we are typically more active than previous generations, as you age, health risks may increasingly affect your quality of life, such as arthritis and dementia. This may mean the need for full-time care. And, given health risks have financial implications too, these should be discussed and factored into your planning.
For many clients, the risks associated with investing remain a concern, particularly for those who have already retired and will find it difficult to generate a replacement income in the future.
However, since the 2008/9 global financial crisis, low interest rates have meant that cash does not provide the returns retirees need – even for those with substantial sums.
And the long-term picture does not project a lot of change. Interest rates will go up if the current increases in inflation become more embedded, but they are unlikely to rise to the levels seen before the financial crisis at any time soon.
In addition, because the returns derived from some investments are linked to the level of interest rates, the yield from these investments has also been driven lower. For example, fixed income has often been a preferred investment choice for retirees since it typically provided reasonable returns and lower volatility (i.e. the measure of the price changes in your portfolio). Many now see bonds and debt instruments as unsuitable when the majority of your portfolio is invested in this asset class.
In this environment, inflation risk is a key concern. In addition, we often find people underestimate how much annual income they need over the long term or overestimate the level of withdrawals their portfolios can reasonably sustain.
Over the past few years, governments around the world have updated pension legislation to adapt to ageing populations and new trends. And they will continue to have to do so, particularly for those developed countries that will otherwise have to increasingly support those who have insufficient savings. The UK is not alone in raising the age for state benefits for retirement. Eligibility for Australia’s age pension, for example, is rising from 65½ to 67 years by 2023.
Other changes have also taken place. In April 2015, one such change saw the pension landscape in the UK changed radically as investors were no longer ‘forced’ to buy an annuity when they retired. As such, there stopped being a definitive point when your pension funds would need to be permanently exchanged for a product providing you with a secure lifetime income. Instead, there was the option – which most now take up – of owning the responsibility for drawing down on your pensions, entering a phase of life called decumulation.
The announcement was a surprise and, despite the press coverage at the time and ever since, many investors still do not understand the complexities and risks (e.g. sequence, longevity and inflation risks) of managing their investments to provide a lifetime income from a finite sum of money.
And as I started with a quote, it feels apt to finish with one. This time, it’s by American country singer and broadcaster Jimmy Dean, who stated: “I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.” This reflects the complexity of retirement planning, the balancing of multiple needs and aspirations and risks required in order to achieve financial success in retirement.
And whatever winds of change might sweep through the future life you have planned, we believe it’s important you should receive support as early as you can, ahead of retirement, in the form of a personal wealth plan. You should also make sure this is regularly reviewed, particularly as you approach the date when you’re looking to retire. providing significant detail, it will allow you to live the life you aspire to in retirement and offer the flexibility to change tack as needed. Just get in touch for an initial conversation as we are here to help you.
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John heads up the wealth planning division for the international business. He works with clients and their families, in tandem with their professional advisers, to ensure they have a clear wealth plan in place to help them achieve their financial and lifestyle objectives. Working in partnership with our teams of private bankers, he integrates the benefits of wealth planning alongside our broader wealth management and wealth structuring capabilities.
John has over 25 years of advisory and management experience, working for global organisations providing advice and solutions to a wide variety of UK and international clients. He joined from Credit Suisse UK where he was head of wealth planning for five years. He has also held similar senior roles at Barclays and UBS.
John is a Chartered Financial Planner, a Fellow of the Personal Finance Society and is a full member of the Society of Trust and Estate Practitioners (STEP).
John heads up the wealth planning division for the international business. He works with clients and their families, in tandem with their professional advisers, to ensure they have a clear wealth plan in place to help them achieve their financial and lifestyle objectives. Working in partnership with our teams of private bankers, he integrates the benefits of wealth planning alongside our broader wealth management and wealth structuring capabilities.
John has over 25 years of advisory and management experience, working for global organisations providing advice and solutions to a wide variety of UK and international clients. He joined from Credit Suisse UK where he was head of wealth planning for five years. He has also held similar senior roles at Barclays and UBS.
John is a Chartered Financial Planner, a Fellow of the Personal Finance Society and is a full member of the Society of Trust and Estate Practitioners (STEP).
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