Having worked for the best part of your life, you want to be able to have a pot large enough that money isn’t an issue. Whether it is travelling the world or spending an inordinate amount of time on the golf course, the dream is to do all the things you couldn’t during your working life.
That being the case, it was pretty sad to see the results of one of our most recent polls.
We asked readers whether they were worried that they wouldn’t have enough saved to retire on at the age they had planned. While 53 per cent of the 1,513 respondents said they weren’t concerned, 47 per cent said they were.
The obvious question to ask is, what should that 47 per cent do? The first – and maybe most unwelcome answer – would be to delay retirement and continue working. The other option could be to take more risk with your investments, but that could be very dangerous.
Jane Heyman, a chartered financial planner at the advisory firm McCarthy Taylor, says there are few options available for investors who don’t think they have enough money to live off in retirement.
"It comes down to the aspect of affordability, because they need to be in the financial position to do what they have planned to do," she said.
"If they have the luxury of disposable income, then we would need to sit down and work out whether using tax-efficient vehicles like pensions or ISAs are the best option, as both have their pros and cons."
"If they still have a mortgage, then they would probably be best concentrating on paying that off first. If they don’t have a mortgage or any dependents and are living in a well-valued property, then they could – as a last resort – use an equity release to generate a bit more capital," she added.
However, Heyman says the most important, and difficult, part of her job is managing expectations, as it all comes down to a person’s ability to save.
"It really is about sitting down with the client and asking them what they think they will need," she said.
"We would analyse expenditure and see if they were planning to spend more than they do now, maybe on holidays or just general enjoyment. It would normally be in their early years when they are fit and well, but will their mortgages or outstanding debts be paid off in time?"
"We also advise clients to click onto the government website and work out what their state pension age would be so they know if the planned retirement age is in line."
"The short-fall between a state pension and a person’s planned retirement age is an interesting topic. Say they planned to retire at 65 – and had saved independently – but their state pension age is 67, do they know how they are going to fund those two years?"
Heyman also says that taking into account the impact of inflation on your pension pot is vitally important, as £90,000 now may be worth a lot less in 20 years’ time.
One of the major reasons why some people may feel they have not saved enough for retirement is because of the ultra-low levels of interest available from an annuity at the moment.
The amount an insurance provider is willing to pay out to an annuity holder is directly linked to gilt yields. Although these have recently risen slightly – 10-year gilts now pay 2.94 per cent, having been at 2.4 per cent a month ago – they are still lower than the historic average.
The main worry is that yields will inevitably rise in the future, so someone buying an annuity now may be worse off than someone who buys one in five years’ time.
However, as FE Trustnet recently highlighted, the current rates of income available on annuities is only a concern for people approaching retirement, as investors who are not planning to retire in the next half-decade could be getting a much better deal.
Heyman (pictured) agrees that yields on gilts will almost certainly change for the better in the future, but says that increasing life expectancy will also become more prominent when an investor’s annuity rate is being calculated. However, she says they need not worry.
"Current annuity rates shouldn’t put an investor off and it is important to mention that you don’t have to buy an annuity as there are other options such as drawing income from your pension," she said.
"A third option could always be to buy a temporary annuity, say for five years, and wait and see if rates increase after that time," she added.
Another way to raise funds for retirement would be to take a little more risk with your investments; however, Heyman says this is where investors need to be careful, as they don’t want to put themselves in an even worse position than the one they are currently in.
"It is an interesting point, because risk can equal return," she said.
"The higher the risk someone is willing to take, then the higher the potential reward could be. It all depends on an investor's appetite for risk and the length of time they have. They need to understand the consequences and I would never advocate taking risk for risk's sake."
"It is quite important to highlight their capacity for loss. If they are investing with the only assets or funds they have, then they cannot afford to take much risk. But, if they are building up a pot over time, then they could look to higher-risk areas to try and achieve their goal."
Heyman’s parting comment is all about the luxury of time. Clearly, the poll results are fairly ambiguous as some of the participants could be 20 to 30 years away from retirement while others could be just months away.
She says that someone who is concerned they will not have enough money saved for retirement, but who is only in their mid-30s, will have plenty of options available while someone in their late 50s should be cautious and may even have to revise down their expectations.
