Avoid the biggest retirement income pitfalls

Pensions and retirement
Views & insights

From failing to protect against inflation to underestimating your longevity, we reveal the biggest retirement income pitfalls.

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12 February 2024 | 3 minute read

Achieving your retirement ambitions can be likened to climbing a mountain. Throughout your working life you are heading towards the summit, from where you can see all the assets accumulated during your working lifetime.

When you are approaching retirement, and the summit is in sight, it’s time to start preparing for the descent, or the decumulation phase.

   


 
     
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The final part of this journey can be potentially hazardous. Here, we consider some of the biggest retirement income pitfalls and how to avoid them.

Failing to protect against inflation

Inflation is sometimes known as the ‘silent thief’. Over time, the rising cost of living can eat into your savings pot and retirement income, reducing its ‘real’ value. For example, the average price of a pint of milk was just 5p in January 1971, compared with 66p in December 20231.

Unless your savings, investments and income are growing at least in line with inflation, your purchasing power will fall as prices rise. A financial adviser can help to mitigate the impact of inflation on your pension and other investments.

Underestimating your longevity

Another key risk is a long life seeing you run out of money in retirement. People tend to underestimate how long they will live. According to the Office for National Statistics, a 65-year-old woman has an average life expectancy of 87 years, but has a one in four chance of living to 94 and a one in ten chance of living to 982.

It is vital to have a realistic plan in place to avoid whittling away your retirement savings too soon. A financial adviser can use cashflow modelling to illustrate when your money is likely to run out, and what impact higher or lower spending could have on your long-term finances.

Failing to structure your income

Knowing when and how to raise money from your investment portfolio is particularly important. There are lots of rules of thumb about drawing income in retirement, but the best approach is one that suits your individual needs and is flexible enough to meet your changing circumstances.

You should also ensure you keep a pool of cash to pay for planned one-off expenses and provide you with a sufficient emergency fund. It is typically considered wise to have around six months’ worth of essential spending in an easy access account. This helps to avoid drawing on investments that have fallen in value.

Assuming dividends are guaranteed

Income from dividends is not guaranteed and it can be volatile. There have been several instances throughout history when companies have cut their dividend payouts. For example, over the 12 months to March 2021, UK dividends declined by 41.6% as two thirds of companies reduced or pulled their dividends during the Covid-19 pandemic3.

A financial adviser can help you build a diversified investment portfolio that helps you maximise your retirement income in a range of market conditions.

How we can help

With so much at stake, our advisers can assist you at every stage of your retirement journey, helping to minimise any risks while maximising income from your savings and investments. We can give you the reassurance that your retirement plans are on the right track.



   


 
     
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The value of investments, and any income from them, can fall and you may get back less than you invested. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

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