Not many days pass without another reminder of the huge subject that is retirement planning; a subject that affects virtually every man and woman in the UK.
It is unusual however to see two reports come out on the same day which, when put together, highlight the seriousness of this subject so succinctly.
The first report comes directly from the Office of National Statistics (ONS) which includes updated life expectancy figures for the UK population.
This includes the fact that the number of centurions in the UK has now quadrupled over the past two decades, the number of people over the age of 105 has increased to 850 today from 130 in 1985, and staggeringly there are now half a million people age 90 or older.
The second report comes from the Money Advice Service (MAS) which shows that more than 16 million people in the UK have savings of less than £100.
MAS reports that there are big areas of the country where half the adult population have savings of less than this amount.
These two reports collide into each other like celestial bodies – resulting in one super explosion of concern.
On the one hand, it is clear that people are living longer, on the other too many people have no proper savings to prepare them for their longer lives. It is a recipe, as they say, for disaster.
There are subtle parts to this which we would like to address. One is that many retirees now wish to use the Income Drawdown route with their pensions when they come to retire. These are the people who do have savings, who now need to organise their income in retirement.
Under the pension freedom legislation introduced by the government in 2015 – millions will now choose to take their money freely and flexibly. But how many of these people understand what is known as the Safe Withdrawal Rate (SWR)?
The SWR is a rate of income which should, all things being equal, based on long-term historical data and trends, keep the money intact – or make it last – for 30 years.
The SWR rate is assessed as being between 2.7% and 4% per year depending on pension charges being applied and one or two other factors.
Let us be generous and assume that it is 4% per year. So someone retiring with £100,000 and withdrawing 4% per year (£4,000), adjusting for inflation, will run out of money after 30 years.
A 60-year-old in this position will have until 90.
But we know that the number of over 90s is increasing rapidly, what are those people going to do if they run out of money?
Bear in mind this is at 4% per year, we know many people will be needing to withdraw more than this – in which case their fund depletes even faster and they run out of money even earlier.
Turing back to savers – they will not have this problem if they don’t have savings in the first place.
They won’t run out of money at 90, they will be dependent on the State from day one of retirement. How happy and secure can retirement be if you are relying on the State?
Interestingly MAS’s report suggests this can be overcome through a re-education of the savings habit. In our Book, The Wealth Secret, we made the very same point in our first chapter.
The only way to correct the savings problem, sometimes known today generically as the Savings Gap, is to save. And to save people need to relearn the habit of saving, as MAS says in their report issued today, saving even small amounts can make a huge difference. Our view is that people need to urgently review their expenditure and build in savings as part of their budgets, redirecting, if necessary, parts of their income from current expenditure into future savings.
This applies at all levels, so even people who have existing savings should be aware of the longevity factors, from the ONS report, and consider carefully if they are saving enough and how they can save more.
Can we make a difference? Yes, we can! Because just as we all can recycle at an individual level to benefit the environment, so we can take charge of our own positions, which, if enough of us do this, will make a difference to the wider economic position.
At Penguin Wealth we are on hand to help with all or any of the issues brought up in these reports; if you need help plotting your retirement income and want to explore Income Drawdown (and especially how to manage the risks) please get in touch. If you want to look at how much you should or could be saving – or how to save more or get a better return we can help you.
If you would like a copy of our Book, The Wealth Secret, then, again, please get in touch.
Note: The ONS and MAS reports referred to were both brought out on 29th September 2016.