When planning for retirement, you need to consider whether your investment situation supports life you envision. This strategy should take into account your retirement income needs and any retirement goals you have. Given the personalized nature of your needs and goals, is the average retirement income relevant to your planning?
Retirement goals can differ significantly, but they all come with costs. How you will spend your money in retirement will generally fall into two categories: non-discretionary and discretionary.
Once you figure out how much income you might need during retirement to cover your non-discretionary and discretionary expenditures, don’t forget to factor in the impact of inflation as well as your investment time horizon—how long you need your assets to last—when determining your longer-term income needs.
Keep in mind the benefits and limitations of the more popular forms of retirement income.
Individual Savings Accounts (ISAs): An ISA can provide you with a tax-efficient way to save or invest your money. Money you withdraw from an ISA generally isn’t taxed as income, meaning that you may be able to take out as much as you wish without risking entering a higher-rate tax band. Some investors may find ISAs useful in helping them meet daily expenses so they can leave their pensions untouched.
State Pension: If you qualify, the state pension will be available when you reach the state pension age. To find out how much you might receive, you can request a state pension statement from the government’s website.[ii] Remember that the income you receive from your state pension is normally taxed at your marginal income tax rate.
Pensions: If your employer offers a pension, you should determine how much pension income you can expect to receive in retirement. Will your pension pot be enough to rely on? Or will you need supplementary sources of money in retirement?
Salary: Some retirees choose to work part-time in retirement. This can be a useful supplementary or primary income source after you retire.
Business and Real Estate: Perhaps you own part of a business. Or maybe you plan to maintain an interest in an investment property. When calculating how much income to expect from these ventures, be aware these income sources could have more variability of return than other forms of income like the state pension or a guaranteed pension. Similarly, they may require your ongoing attention or involvement.
Annuity: Some investors will choose to use their pension pot to buy an annuity in an attempt to provide guaranteed income. An annuity is an insurance product that allows you to use your pension pot to receive guaranteed regular income for the rest of your life. Most income from an annuity will be subject to income tax just as a salary would. While the income guarantee may be enticing to some investors, you should consider things like:
Annuities can be complex and it’s important to understand their characteristics. Annuities are often low-returning compared to other investments like equities, and you will not have flexible assets to the capital after purchase. Though annuities may sound safe, make sure you understand the details of an annuity contract before purchasing one.
Many factors exist when considering planning and saving for retirement. It would be a mistake to identify an average amount of income other retirees may require and use that figure to estimate how much you should plan for or expect to receive. But the average retirement income may hold little relevance for your personal situation, needs and goals.
Rather, your personal situation is likely defined by variables specific to you, including your retirement needs and wants (travel, hobbies, etc.), your rate of savings and any dependants who rely on you.
Likewise, a country-specific average retirement expense doesn’t anticipate the changes likely to occur throughout retirement. Things these averages won’t consider are your potential need to be flexible in how much you withdraw from your accounts, any unexpected health changes and any additional expenses which may affect your income needs.
Hence, planning for the average retirement income or using it to project your retirement income needs may be a fine reference point, but it is likely imperfect way to plan your retirement income strategy.
With careful planning, you may be able to achieve the retirement lifestyle you envision.
If you aren’t sure how to proceed or need help getting started with your retirement plan, speak with one of our qualified professionals to learn more about planning for your retirement.
[I] Source: Global Financial Data, as of 01/11/2017. Based on UK Retail Price Index in GBP from 1915 to 2016.
[ii] Source: www.gov.uk/check-state-pension
Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.