There is a lot to look forward to as you plan your retirement. Perhaps you’re excited about the opportunity to take up new hobbies or visit new and exotic places around the world. Or maybe you’re looking forward to spending more quality time with your spouse, your children, and your grandchildren.
But there may be some things you’re a little nervous about. Indeed, one of the most common worries, according to a report by Aegon, is the risk of running out of money later in life.
Making sure your savings last as long as you need them to can be tricky, particularly when so many variables can affect this.
Keep reading to discover why many retirees are worried about running out of money, plus how our cashflow modelling tool could help bring peace of mind.
Running out of money is a common concern for many retirees
The Aegon report suggests that 71% of financial advisers have found that the most common fear among their clients is outliving their savings. Other common worries included the effect of inflation or the cost of living on wealth, as well as the cost of long-term care.
It’s natural to feel nervous about the prospect of managing your money through retirement. After all, you’ve worked hard and saved for many years to be able to retire. So, you want to be sure that those savings will help you to live your preferred lifestyle for as long as you need them to.
If you choose to withdraw from your pension using flexi-access drawdown, you’ll have the freedom to take a lump sum from your savings as and when you feel it’s necessary. While this flexibility can be helpful, it also means you must monitor your withdrawals carefully. Taking too much from your pension could increase the risk of running out of money later on.
As recent economic events have demonstrated, though, sometimes factors outside of your control can affect your savings too.
If inflation rises more quickly than anticipated, you may need to withdraw from your pension at a faster rate to cover your expenses. Moreover, uncertainty on the economy can translate into volatility on the stock markets, potentially affecting your returns over the short term.
It’s impossible to know for certain what could happen next when it comes to the economy or stock market. But your planner can help you to prepare for these shocks if they happen using a tool called “cashflow modelling”.
Cashflow modelling shows you how your wealth can support you at different stages of your life
Cashflow modelling can help you to visualise how your wealth and income needs might change over time. In doing so, you can make a more informed decision about how much to withdraw from your retirement fund and when. Additionally, you can take proactive steps to prevent a shortfall in income from affecting you later on.
Your planner will start by entering data about your:
- Income
- Assets, such as savings, pensions, properties, and investments
- Financial commitments, such as your mortgage and other debts
- Preferred retirement date, and your anticipated income needs in retirement.
They will also make some educated assumptions about inflation and investment returns within that time.
In doing so, the software will produce an easy-to-read graph demonstrating how your net worth and income needs could change over the course of your life. Moreover, it can predict whether you could face a shortfall in income at any point during your lifetime.
Your cashflow model offers some insight into how future events might affect your wealth
Your cashflow model provides a helpful snapshot of how your net worth might change over time based on the data your planner has entered. But there are many other ways you can use the forecast to help you plan your finances more effectively.
One of the ways you can do this is to model how different scenarios might affect your wealth. For example:
- What if you had to take a career break due to illness or injury?
- How might an earlier or later retirement date affect the income you can take?
- Could you afford to give a financial gift to your family during your lifetime?
- If you are a business owner, how might selling your business affect your wealth?
- Could you still afford your dream retirement if inflation rose more quickly than anticipated, or if investment returns were lower than you hoped?
These are some of the questions that might cause you concern. But by modelling them with your planner, you can see whether any of them could put you at risk of running out of money or being unable to afford your preferred lifestyle.
Consequently, you can take steps to ensure, where possible, that these eventualities don’t create financial hardship later on.
Make sure you revisit your cashflow forecast regularly to keep your financial plan on track
Your cashflow model can provide a fast answer to some of the burning questions you might have about how your finances will support you through each stage of your life. But remember that, over time, if your circumstances change, you may need to revisit your forecast.
For example, if you inherit a lump sum or if your investment returns are different than you anticipated, your planner might suggest reviewing your financial plan to account for this. As such, updating your cashflow model annually could help you to ensure you are still making the most sensible decisions with your wealth.
Get in touch
Our team of independent financial advisers in Lewes is here to support you in growing your wealth and preparing for your dream retirement.
To find out more, please get in touch by emailing us at financial@barwells-wealth.co.uk or by phone on 01273 086 311.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The Financial Conduct Authority does not regulate cashflow planning, tax planning, or estate planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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