Avoid these common mistakes to sustain your lifestyle in retirement
Many of us underestimate how much money we will need in retirement. We explore where people often go wrong.
Retirement planning
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People used to think if you spent 4% of your assets annually once you retired, you’d be unlikely to run out of money during the rest of your lifetime. We know that approach needs changing with longer lifespans, lower returns, higher inflation and increased costs of care, even millionaires are at risk of running out of money in retirement.
We’ve outlined some of the important things you need to know, and do, to help your money last through retirement.
Do: Think about what you want your retirement to look like
The traditional concept of a retired life no longer applies. Today, most people take an approach to retirement that suits them. Some people never officially retire at all! But whatever route you take, it’s important to consider how you plan to spend your time: do you want to travel, or will you devote more time to your family, hobbies and interests? Setting out some of your retirement plans in advance will not only help to give you a sense of purpose, but will also help you to get a better idea of how much income you need to secure the lifestyle you want.
How much income you need will depend on your current circumstances, including any outstanding financial commitments, as well as the lifestyle you’re hoping for during retirement. Many retirees are still supporting their adult children with the “bank of Mum and Dad” contributing to weddings or house deposits. It’s important to recognise that the income you need in retirement might extend beyond standard living expenses.
Don’t: Underestimate your retirement needs
Even people with larger retirement pots struggle to estimate how much retirement actually costs. According to the 2023 Wealth Index published by Saltus, high-net-worth individuals (with £250k+ investable assets) said they expected a pension pot of £578k would achieve an individual income of £55k in retirement. But withdrawing the standard 4% of your pension pot each year would give you an annual income of £21,552. In fact, an annual retirement income of £55k requires a pension pot of more than £1.3m1, almost double the average estimate.
People also underestimate how long they will live. According to the Office for National Statistics (ONS), a 55-year-old woman has an average life expectancy of 87 years, while the average for a 55-year-old man is 842. But averages don’t tell the whole story. Our 55-year-old man has a one in four chance of reaching 92, while our 55-year-old woman has a one in four chance of reaching 94 and one in ten chance of celebrating their century. In other words, if you’re in good health, you could spend at least two or three decades in retirement, so you need to understand what impact this may have on your retirement pot.
Do: Get cash flow projections so you know where you stand
It’s essential to talk to a financial planner about your retirement pot and how much income it could generate. Financial planners use cashflow projections to calculate how long your money is likely to last in retirement, and whether the income meets your expectations. They can then adjust your retirement plan if required, to help address any potential shortfall, while ensuring your money is invested in ways that achieve the best available income.
Don’t: Ignore the impact of inflation
It's hard to ignore the current cost-of-living crisis. But while inflation is eroding people’s spending power today, it could have an even more damaging impact on your retirement. If rising prices mean your income isn’t stretching far enough, you run the risk of depleting your savings and could even run out of money completely.
For example, whether you need £50,000 or £100,000 today to meet your living expenses in 15 years you’ll need £90,000 or £180,000 respectively based on the long-term average rise in the cost of living of around 4%.3
Fortunately, this is where cashflow modelling can make a big difference. A financial planner can ‘crunch the numbers’ to give a clearer picture of the impact inflation would have on your investments and savings. They can also recommend steps to combat inflation.
Do: Become more tax-efficient
For most people, their pension is still the most tax-efficient vehicle for retirement, as the government offers generous tax relief on your pension contributions. With the increase in the annual contribution limit from £40,000 to £60,000 (dependent on earnings) and removal of the Lifetime Allowance from April 2024, the scope to further build tax-efficient savings is considerable. But a significant number of high earners are missing out.
According to a series of Freedom of Information (FOI) requests to HMRC, between 2016/17 and 2020/2021 76% of higher-rate taxpayers and 46% of additional rate taxpayers left behind £1.3 billion by failing to claim their additional 20% or 25% tax relief, on top of the 20% relief that’s already been paid.
Just ensuring you claim your entitled relief could make a big difference to your overall finances.
Splitting your investments with your partner can also boost your wealth. If there is an unequal division of income, married couples or civil partners may want to consider equalising investments to make the most of each partner’s ISA, income tax, capital gains tax allowances and pension contribution limits.
As well as taking advantage of these allowances, if suitable for you, a financial adviser may recommend Venture Capital Trusts (VCTs) or the Enterprise Investment Scheme (EIS). Both offer significant tax incentives that compensate for investing in higher-risk early-stage companies.
Don't: Ignore the need to pay for long-term care
Anyone with savings over £23,250 must pay their own social care costs. This includes care at home, sheltered housing and care home fees, which could significantly drain your retirement resources. So, instead of relying on savings or pension income to pay for care, it could be better to talk to your financial planner about an investment strategy where care costs can be covered for as long as necessary.
Do: Get professional help with your financial plan
Whatever you want your retirement to look like, our financial planners can help you to lay the groundwork. Even if your retirement date is still decades away, and you haven’t yet managed to build up the pension savings you’d hoped for, now might be the time to start making changes to help you achieve your target income. Because the choices you make now can make a big difference to the retirement lifestyle that you and your family will one day enjoy.
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1 Source: Saltus.co.uk
2 Source: ONS
3 Source: UK Retail Price Index from 1915-2020 (4.03%)
Important information
The contents of this publication do not constitute a personal recommendation or advice and the products and/or services referred to may not be suitable for all investors. It is important to consult a professional adviser before taking any action or making any decisions.
The value of investments and the income derived from them can go down as well as up and you could get back less than you originally invested. Your capital is at risk.
Tax treatment is dependent on individual circumstances. This information is provided in good faith and is based upon our understanding of current tax law and HMRC practice, which may be subject to change in the future.
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