Retirement can last for 30 years or more depending on when you retire and how long you live. Your income in retirement is likely to come from several sources including your State Pension, any other pensions you’ve built up while working and any savings and investments you have.
Before you give up work you need to make sure these will provide you with enough money to live on for the whole of your retirement.
How long will my retirement be?
Most people underestimate how long they’re likely to live.
A 65 year old man now has a 50% chance of living to 87 and a 65 year old woman a 50% chance of living to 90 (Source: ONS 2014).
If you’ve only planned for 20 years in retirement and you live longer than this, you could find yourself struggling financially later in life.
As most of us don’t know how long we’re going to live it’s hard to know how long our money needs to last.
You don’t want to use up your money too quickly and risk not having enough later on.
On the other hand, you don’t want to have to live more frugally than you need to.
You also need to consider how inflation can affect how much money you’ll need to live on and how long your savings will last.
How long will your money last?
Your retirement money needs to last as long as you do.
As few of us know how long we’re likely to live this is difficult to plan.
But what you can do is make sure you use as much of your money as necessary to set yourself up with a secure income that will pay for the essentials (such as your home, food and bills) for the rest of your life.
Prices tend to rise over time so if you want to maintain your standard of living you need your retirement income to keep pace with inflation.
The State Pension increases by at least the rate of inflation each year and if you receive a retirement income from a past employer this often rises by the rate of inflation or a set amount each year.
If you rely on savings and investments to boost your income, you’ll probably need to increase the amount you take from these over the years if you want your income to go as far as it used to.
If you take more income than your savings and investments earn each year, you will gradually eat into your capital.
The longer this goes on, the less savings you’ll have and the greater the risk of these running out.
Secure income is any regular income you can rely on for the rest of your life.
You will probably already have some secure income in retirement.
Your State Pension is guaranteed for life.
You might also be due a retirement income from a former employer if you were in a salary-related or defined benefit pension (such as a final salary or career average pension scheme).
This will provide you with a regular income for life.
You might have contributed to an employer or private pension scheme where you built up your own pension pot.
If you need to top up your secure income, you could use some of this pot to buy a lifetime annuity.
This is an insurance policy that in return for a lump sum guarantees to pay you a regular income for life regardless of how long you live.
You can arrange for this income to rise over time so that its value is not eroded by inflation.
This income is secure so there is no danger of it drying up.
If you have enough secure income in retirement you might choose to leave your pension pot invested and take a flexible income or lump sums from it when you need them.
Your pension pot has the opportunity to grow but there is also a risk that your investments might fall in value.
If you rely on this to provide you with an income, you might have to reduce the amount you take if your pot falls in value or risk your money running out if you live for longer than you plan for.
The same goes for any other savings or investments you have.
You can take a flexible income from these but you need to monitor how much you take to make sure they last.
If you need your savings and investments to last longer than you planned for or they don’t earn as much income or interest as you expected, you might have to reduce the amount of income or risk running out of money.
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