Throw into the mix that as a society we tend to be living longer and it creates a perfect storm of not having enough money to see out the rest of our lives.
I'm sure advisers are all too familiar with the burning question from clients: 'How long will my pension last?'
There’s no set answer to this but that’s why advisers help clients to determine their goals and implement a plan to ensure their money works as hard as possible.
And of course, whenever we try to predict retirement income, it’s always worth keeping its nemesis – sequence risk – in mind too.
Investment portfolios can fall victim to market shocks and if this happens earlier on in retirement alongside large withdrawals, it can have a detrimental impact over the long term.
We’ve seen some worrying trends around how much money is being withdrawn from pensions and the rate it is being taken out.
We might not always know the context around such figures. But overall, it’s not likely to be sustainable for the average person.
The transition from accumulation to decumulation can be a daunting prospect for many. And there’s a lot to consider when drawing down on pension funds.
So, what about retirement income? Could the pensions sector learn from the savings world and potentially reverse engineer the 'save the change' idea?
Cash flow modelling tools and investment strategies allow advisers to focus on the inputs but potentially the missing link is controlling the outputs and adjusting income taken when appropriate.
Could retirees shave money off the income they need each month and keep it invested for longer? And could we make this more of an automated thing, so it doesn’t need to be mulled over at length? Especially as we have seen this approach has worked to some extent elsewhere.
If people find themselves with more cash at their disposal they could decide to withdraw less. Open banking could help in this regard to facilitate the automatic rule application.
Sounds simple, doesn’t it?
Clients could sit down with their adviser and set up a few basic rules around what they need as a bare minimum to cover the essentials and fixed expenses.
Then factor in some discretionary spending and some fun money.
Allow a bit more for the smaller luxuries in life, plan for some of the bigger ticket items and fine tune accordingly to a level they would feel comfortable with.
It could fit in well with cash flow modelling but also be modelled on managed funds performance and make a real difference to the pension pot.
