Retirees have traditionally hated inflation. It often has a brutal effect on fixed incomes such as the State Pension and annuities. Pension freedom may have helped to take the edge of this somewhat. Even so, inflation is likely to have to remain a concern for retirees for many years to come. Here are some of the key points you need to consider.
Say goodbye to the 4% rule
Back in 1994. William Bengen theorised that retirees should withdraw 4% of their retirement savings in the first year of their retirement. After that, they should increase that amount in line with inflation. Bengen’s research and calculations indicated that this approach would ensure that retirees always had enough money to see them through retirement.
Now, however, even Bengen has accepted that his “4% rule” has become outdated. On the more positive side, the downfall of the 4% rule does illustrate the dangers of relying on fixed rules. Bengen’s rule was created in a very different environment. Stock-market returns were relatively high, inflation was relatively low and life-spans were shorter.
People reaching traditional retirement age today may have decades ahead of them. This means that they are probably going to need to navigate their way through a wide variety of circumstances. There is also a strong likelihood that their need for funds will be heavily skewed towards their latest years when they need the most help.
Be prepared to delay retirement
Delaying retirement does not necessarily mean carrying on with your regular 9-5 job for as long as you can. It can mean transitioning steadily into full retirement. It can also mean continuing to work, in some capacity, for as long as you can. For many people, it’s increasingly likely to mean a combination of both.
In other words, modern seniors are likely to scale down the paid work they do. Eventually, it will reach a baseline level that they feel comfortable maintaining over the long term. This may involve them changing their role to some extent. In some cases, it may involve a significant change.
For example, if your work is heavily manual, then, realistically, you will probably have to give it up relatively early. You may, however, still be more than capable of pursuing some other means of earning income. This means you will at least need to pivot if not move into another field entirely.
Remember your State Pension
For years, retirees have been warned against relying on the State Pension. This warning is still very valid. At the same time, while the State Pension exists, it makes sense to use it. Under current rules, deferring the State Pension does increase its value. It can therefore be worth holding off taking it if you can.
With that said, deferring taking an annuity or drawing down from your pension fund can be even more valuable. This means that it could, potentially, be worthwhile to take your State Pension early and defer taking your private pension(s).
Prioritise paying off debt
If you still have high-interest debt (e.g. credit-card debt), then paying it off should generally be one of your highest priorities. Even when interest rates were relatively low, the cost of consumer debt was likely to be far higher than average investment returns. With interest rates going up, this difference is probably only going to become higher.
This means that it could be worthwhile for you to access a cash lump sum as soon as you can. Use this to repay or at least reduce your debt. If necessary, apply standard debt-reduction strategies to deal with the rest as quickly as possible.
Realistically, this could mean that the start of your retirement is a bit less comfortable than you’d like. If so, remember that your retirement is likely to be a lot longer than retirements in previous decades. This means that the effort is likely to have a significant payoff in the middle and later stages of your retirement.
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