An enjoyable and relaxing retirement is what most people spend their working life waiting for, but how does anyone know they have enough saved up to make sure that dream becomes a reality?
This has always been a prominent concern for those reaching their twilight years, but with life expectations now far longer than they have ever been and the recent changes to the pension system (and with that, the temptation to take all of your savings in one fell swoop) it is now a far more worrying question than it has been for other generations. 
A recent FE Trustnet article highlighted how savers can make sure they have a significant pot to live off during their retirement and here Adrian Walker, retirement planning expert at Old Mutual Wealth, gives his tips on how investors can make sure it doesn’t run out when it is most needed.
Of course, it is no surprise the vast majority people who are approaching retirement are baffled by the complexity of working out exactly what they will need in the way of income once they have stopped working even if they have saved a significant pot.
Walker, for instance, says investors will tend to think more about the short term than longer term. He says this isn’t necessarily a bad idea, though.
“I wouldn’t necessarily like to plan out my next 25 years as I have a far more clear idea of what I want over the next one, two or three years. I’m only going to be more certain of my longer term plan as I get older,” Walker (pictured) said.
Nevertheless, to break it down more easily, he says retirees should divide their prospective costs into four manageable categories – essential income needs, known costs, unknown costs and legacy.
Hierarchy of retirement income pyramid
Source: Old Mutual Wealth
Before we take closer look at these categories, Walker points out that savers should analyse their income needs on an annual basis (preferably with the help of an adviser) and should realise that circumstances will change – whether it is their health, the health of their partner or the actual regulations regarding the way in which different forms of saving, including pensions may be taxed and available in the future.
However, he says it is far easier to manage one’s retirement income if it is no longer viewed as a homogenous block and therefore he runs through the different categories, what they entail and which are the most suited investments for them.
Essential income needs
As it names suggests, this categories relates to all of a retiree’s most basic needs such as paying the bills, buying groceries or even paying off a mortgage.
Given that information, Walker says savers should only use very low risk assets as their propensity for loss should be much lower here.
These assets could include bonds and other defensive securities, rather than equities. However, Walker adds that investors shouldn’t just keep all of this category in cash.
“You need to have some growth as you could be looking at around 25 years’ worth of income. You will of course want some cash for a rainy day, but you may be better off looking fixed term cash deposits,” he said.
He added: “You can find the best deals by looking at the comparison websites.”
He says investors may even wish to consider using part of their pension savings to purchase an annuity, which is a series of equal payments at regular intervals spanning the rest of an individual’s life to help provide the certainty of meeting these income needs.
While he understand why so many are shunning annuities since the changes to the pensions system, he believes “they have role to play” within a retirement portfolio even if it means just investing a small proportion of overall savings.
“For those who are concerned about whether or not they have enough money to get them through retirement, annuities are a core answer as the income they produce will last as long as you live,” he said.
“However, they are perceived as poor value at the moment and investors should realise that any decision made about the type of annuity they buy todays now could affect them for the next 20 to 25 years.”
Known and unknown costs
Known costs, according to Walker, include lifestyle choices, holidays and events. You can think of this category of what you really want to do when you retire, whether this is to travel the world, spending an inordinate amount of time on the golf course or to put the grandchildren through education.
For this category, Walker says investors can afford to take a higher degree of risk than for ‘essential income needs’ as they may need to grow their pot of savings in order to pay for these lifestyle choices over time.
The types of investments they may wish to consider include absolute return or multi-asset funds which generate their returns from a diverse range of securities.
Of course, though, after talking to an adviser and realising they may not have a sufficient enough pot to fund these known costs, Walker says retirees may have to change their retirement expectations or take on part-time work.
In terms of unknown costs, Walker says these relate to out of the blue payments such as potential hospital bills or an unexpected boiler breakdown. Again, investors can afford to be medium risk for this bracket but Walker says that they might want to build up a six-month cash buffer from their overall savings to make sure they can access those funds easily.
Legacy
Legacy, while relatively sombre, relates to the assets you leave behind for your loved ones.
Given people are generally getting older, investors can afford to take a higher degree of risk initially as these savings may not be needed for another 25 to 30 years. Walker says, as a result of this, investors can afford a higher degree of equity exposure. Over time they will need to consider reducing that risk.
The past is, of course, no guide to the future but FE Analytics shows that the FTSE All Share index has returned 1,433.70 per cent over the last 30 years so if an investor had put £10,000 into the market, they would have since seen a gain of more than £151,000 today.
Performance of index over 30yrs
Source: FE Analytics, bid-to-bid performance with dividends reinvested over 30 years to 31 December 2015
On the other hand, retirees may wish to see the fruits of their legacy before they die either by funding their grandchildren’s education or getting them on the property ladder.
Walker says they should sit down with their children to discuss this, however, as any such planning will not only affect the long term value of a potential inheritance but may help their children with their own savings planning..
Either way though, he says they should be taking a higher degree of risks because if they did want to pay for their grandchildren’s school fees from a legacy pot of, say, £20,000 there is still little need to hoard it in cash.
He added: “You’ve got to think that ‘we can afford to be more aggressive as quite a high proportion of that pot is going to be invested for a long period of time’.”