Which retirement solution, or combination, is right for you?Ĥ. Do you need to contribute more or change your objectives?ģ. Patterson said retirees, and those who are still saving for retirement, need to consider these eight questions to help determine the plan for their pension:Ģ. ‘ modelling can make sure there is a contingency, and make sure there is significant provision to cover. ‘Life is unpredictable and anything can happen,’ said Patterson. These are harder to plan for and the only option for dealing with them is to have a contingency or the ability to adjust a retirement plan. He can also factor in stock market crashes that ‘see if there is a capacity for loss’. Patterson uses ‘cash-flow modelling’ to determine how long a pension pot will last based on the level of income a person wants to take. ‘This is a key problem,’ said Patterson, who said the best way to prepare for a shortfall was to try and ‘visualise retirement’ to make sure you save enough for the retirement you want.Īiming for annuitisation at age 75 also helps to ‘benchmark against spending in early retirement and see if there is enough left later on’, he said. ‘You can draw an income from different sources so you can harvest the gains while avoiding crystallising losses,’ he said. Patterson mitigates this risk with a ‘multi-asset fund strategy’, choosing funds that invest in a number of assets to spread the risk of withdrawing income from your pension savings at the wrong time. ‘If you are drawing money out you have the opposite effect which is why it’s known as "pound cost ravaging",’ said Patterson. Patterson said this was the reverse of ‘pound cost averaging’ where you benefit from drip-feeding money into your investments to take advantage of price drops in order to buy more units, making up for the times when you buy when the price is higher. Take the two funds below, from which the saver is withdrawing 6% a year in both cases. Sequencing risk can mean that two pensions with exactly the same withdrawal rate and same average return over a certain period can end up looking very different. Sequencing risk is the danger that you take out too much of your income when markets are down, crystallising your losses which then have a greater impact on your remaining savings. When Patterson talks about investment risk, he does not mean poor investment returns – although that is part of the risk – he means specifically sequencing risk. The cost of a litre of petrol has risen by 4% from 54p to £1.19 and the cost of a property has risen from £87,012 in 1995 to £205,530 today – inflation of 4.4% a year. Between 19 the price of a loaf of bread has risen from 45p to £1.25, annual inflation of 5.2%. To illustrate the effect of rising prices Patterson uses the cost of everyday items. ‘You have to ask how long would it take for inflation at 4% a year to halve the value of your income and is 20 years – that is the damage it would do in a 20 year period.’Ĭonsidering retirements are very often much longer than 20 years, the impact of inflation should not be dismissed. ‘We have got used to low inflation but if you go back 20 years then inflation was an average 4% to 5% per year,’ said Patterson. Although inflation is zero at the moment, it hasn’t always been as low and won’t remain at that level forever. It is not only outliving your money that is a concern: inflation can erode the value of your savings considerably over the years unless your investments keep pace. When advising clients in drawdown, Patterson models their financial situation to age 75 because he believes at this point it is better for individuals to annuitise and remove the risk of outliving their money entirely. ‘Annuities…take out the longevity risk…and I think it’s a case of not whether you buy an annuity but when,’ he said. Patterson said living too long was a ‘real problem’, especially for those in drawdown. No-one can predict exactly how long they are going to live but the fact is most people underestimate how long their life expectancy will be.Ī male aged 65 today has a 50% chance of living until 89 and a 25% change of living to 95, while a female aged 65 has a 50% chance of living to 93 and a 25% change of living to 97.Īnd if you are in a couple, and both aged 65, there is a 25% chance of one of you living to 99 years old.
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