Picturing retirement income: a fusion of art and science?
Getting the most out of your retirement requires a thorough and honest understanding of what you want to achieve, both personally and financially.
These objectives are a key element of the conversation between you and your adviser.
“Alongside your financial position, a financial adviser will consider your planned lifestyle post-retirement as well as your current lifestyle when assessing your needs,” explains Robin Stoakley, Head of UK Intermediary at Schroders. “This will help them to provide advice that is tailored to your individual circumstances and preferences.”
Start with a target
The UK Money Advice Service recommends setting an initial target for what you think you might need. This figure does not need to be set in stone since it can be tweaked to reflect changing circumstances, but it will give you an idea of the monthly income you think you will need when you retire, which can be expressed either as a sum of money or a proportion of your income from employment.
The most generous pension schemes aim to provide a retirement income of two thirds of salary, while others target around 50%, so using between half and two thirds of your current salary is a useful rule of thumb when planning for your retirement income needs.
Expenses may rise as well as fall
Another way of arriving at a monthly target is to estimate your outgoings in retirement. If you do this, you should consider that people often find their expenses fall once their working life ends, especially if mortgages or other debts have been paid off. But don’t automatically assume that all your expenses will go down - some may increase, such as heating and leisure costs.
If you have plans to travel post-retirement or intend to set up a business, there is every possibility that your expenditure might increase significantly. Different retirement goals will require different levels of income, which may test your appetite for risk.
If you have identified more than one main retirement goal, it is worth considering the level of risk you are prepared to take on the income you need to support each goal. Of course you need enough to live comfortably and the risk level on income to cover daily living should be minimal, but would you be prepared to accept a higher level of risk for the proportion of your pot that is earmarked for funding a new hobby?
“Savers need to balance both risk and return very carefully when making their decisions rather than just focusing on either risk or potential return – they are always linked,” says Stoakley.
How does your personality affect your investment decisions?
Your personality has a significant impact on your investment and risk decisions because losses have a greater emotional impact than equivalent gains. To measure the extent to which this affects you, consider the following scenarios:
Firstly, you have £1,000 and must choose either a 50% chance of gaining £1,000 and a 50% chance of gaining nothing (option A) or a guarantee of gaining £500 (option B). Secondly, you have £2,000 and must choose either a 50% chance of losing £1,000 and a 50% chance of losing nothing (option A) or a guaranteed loss of £500 (option B).
Logically, you would choose either ‘A’ or ‘B’ for both scenarios. However, research has found that while most people would play safe on their gain, they would take a chance to limit a loss.
The science behind such psychological influences on investments is called 'behavioural finance'.
A financial adviser will carry out a detailed review and assessment of you overall financial situation, your current and future needs, and your risk appetite. This will enable them to advise you on an appropriate investment strategy that could minimise the impact of behavioural biases.
Information is king
Most customers expect advice tailored to their individual circumstances and aspirations, especially those with the largest pension pots. They are also likely to seek information from a variety of sources so that they can ask sensible questions of their adviser.
However, they will often also have multiple, conflicting objectives – looking for a substantial income guaranteed over their lifetime as well as the ability to leave a significant inheritance. No single product can deliver all these objectives, so one of the jobs of the adviser is to manage expectations and explain what each product offers.
Income funds can be a useful component of a flexible retirement income plan. While they are designed as a medium- to long-term investment, you can withdraw part or all of your money at any time.
For more information on retirement solutions from Schroders, visit www.schroders.co.uk/retirement.
“Savers need to balance both risk and return vary carefully when making their decisions rather than just focusing on either risk or potential return – they are always linked.”
What to discuss with your financial adviser:
Your retirement income priorities
The implications of planned lifestyle changes
The level of investment risk with which you are comfortable
If you do not currently have a financial adviser, one option is to search for a local, independent adviser atwww.unbiased.com. You may also find it useful to visit www.vouchedfor.co.uk, where members of the public rate and review advisers they have used.