Whilst each individual’s retirement goals may be different, investors may follow similar steps in their retirement planning process. For example, most investors need to participate in some sort of retirement income planning—preparing for any necessary income in retirement. Here are some factors to consider as you plan or revisit your personal retirement income plan.
One of the first steps to successful retirement income planning is to closely examine your expenses as they are now in your pre-retirement lifestyle and calculate how they might differ once you stop working. Your planned retirement expenses might include the following:
Depending on the situation, retirees may neglect to save enough to account for their unplanned expenses. Although unplanned expenses can be difficult to quantify, it may be wise to consider potential unplanned costs in your retirement income planning and have excess funds set aside just in case. Here are examples of some unplanned expenses you may encounter in retirement.
Of course, there is no perfect formula to calculate how you will actually spend your retirement savings, but there are some circumstances and scenarios that are more likely than others, which can help you get a better rough approximation of your potential retirement expenses.
When considering your investment time horizon—which we define as how long you will need your portfolio to last—consider that you may live longer than you expect. Ongoing medical advancements have led many investors to live longer than they might have expected. Underestimating your investment time horizon could increase your risk of running out of money in retirement. When looking at the average life expectancies for your country, remember these are only averages. You may live 5, 10 or even 20 years longer than these projections, particularly if you are in good health and your parents or grandparents lived long lives. In practical terms this means that your retirement income planning should work towards having assets and retirement income that will last longer than even your most optimistic projection.
Inflation is another frequently overlooked aspect of retirement income planning. Remember, your financial needs will very probably increase over time as inflation reduces the purchasing power of your money. Your retirement income planning should account for inflation and seek adequate growth in order to provide sufficient cash flows for you in the long term.
Keep in mind that if you are relying on lower-risk, lower-returning investments as a major component of your retirement strategy, it is critical to keep in mind how the real purchasing power of your cash flow is likely to decline over time. When inflation rises, interest rates may follow. Fixed-interest investors could then face two risks: falling purchasing power of their current coupons and falling bond prices due to rising rates. Inflation erosion can also affect other sources of retirement funding—you may need to ensure that your plan accounts for any necessary income growth.
When retirement income planning, you should also consider any sources of non-investment income you may have in retirement. While there are many potential sources of non-investment income, here are some of the most common ones:
One of the more complex aspects of retirement income planning is working out how much investment income you can expect throughout your retirement. It is important to sit down with your financial planning professional to discuss this thoroughly. Issues you should consider include the following:
You should do your retirement income planning while considering your long-term goals and objectives. This means you should understand the drawbacks of making emotional short-term decisions—for example, straying from your long-term investment strategy to invest in “hot” investments or sell out of shares during times of heightened short-term market volatility.
This does not mean that you should be overly cautious—the growth required for higher returns may require you to tolerate the higher short-term volatility associated with those returns. If you invest too conservatively and earn too low of a return, you may risk one of the greatest retirement income planning mistakes of all: running out of money.
Fisher Investments UK can help you begin the retirement income planning process. If you are a qualified investor with at least 350,000 € of investible assets, our professionals may be able to evaluate your portfolio, asset allocation and investment strategy.
To learn more contact us today or request a free educational guide on retirement income.
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.
