Top three mistakes to avoid when it comes to a financial advisor’s retirement income
Everyone has an idea of what their dream retirement looks like. But getting there takes years of hard work and careful planning.
We take a look at some of the most common retirement mistakes and how you can make sure they don’t cost you the retirement you want. Pension and tax rules change and any benefits will depend on personal circumstances.
While this article can provide you with helpful advice, it is not personal advice. If you’re not sure whether something is right for you, seek financial advice.
Not having a retirement budget in place
A retirement budget should be the backbone of your retirement plan. It doesn’t have to be too complicated, but it should be well thought out.
You can do this in two steps.
The first is to figure out what your essential fixed expenses will be. Things like household bills, car and council tax, food, insurance and even medical bills. You will have an idea of how much income you will need each month to cover these essential expenses.
The second is to factor in your one-time expenses like vacations, restaurant meals, club memberships and even spoiling grandchildren. This is especially important if you plan to be more active in the early years of your retirement, when those costs might be higher.
When and how to access private pensions, or what an appropriate investment strategy looks like, is much easier to plan with a budget in place.
Not having a secure income in retirement
Once you know the amount of your essential expenses, it is always best to have them covered by secure sources of income in retirement.
A secure source of income is a guaranteed source and will pay you income until your death, or after, as it could be passed on to your loved ones. The state pension, an annuity or a retirement pension are all sources of secure income. These are different from pensions held in drawdown, since your pension remains invested. This means that your income could drop or even stop altogether if your investments don’t perform as well as you hoped.
Unsecured income, on the other hand, comes from sources that are not guaranteed, such as direct debits, rental income, investment income or interest on bank deposits. The danger with these is that they might fall unexpectedly or disappear altogether.
If you plan to use your State Pension to cover your fixed expenses, you can check how much you will receive and when it will start with a State pension forecast.
If you are an active or deferred member of a final salary pension scheme, including public sector schemes like the NHS or Teachers’ Pension, you can request an income projection from the scheme administrators. Knowing this will help you build your retirement plan and see if your secure sources of income will be able to cover your essential retirement expenses.
When it comes to annuities, you don’t have to use your entire annuity to buy one. You could buy one to cover your expenses for the rest of your life. Or you can use a small amount to make up any shortfall from other secure sources of income.
You may even be eligible for an enhanced annuity. If you smoke, drink, or have an underlying health condition like diabetes or high blood pressure, you’re more likely to qualify. But keep in mind that once established, an annuity usually cannot be changed – so it’s important to carefully consider your options.
What you do with your pension is a big decision. You need to understand all of your options and make sure that the option you choose is right for you. Get free advice from Pension Wise on your retirement options and, if you still don’t know what to do, get personalized advice.
Not knowing what risk to take
Leaving your entire pension withheld can have its setbacks. You might run out of money if you take too much income too early or if your investments fluctuate more than you expect. These two potential pitfalls should be taken into account when developing a retirement plan.
When drawn, your annuity is only an extension of your investment strategy. And to generate any income in retirement, there is an element of risk involved. This is because the funds left behind are not guaranteed.
We see a lot of retirees taking more risk before retirement. But then, put the brakes on and stay in low risk portfolios once they start drawing income from their pensions.
It can be tempting to reduce your drawdown risk to minimize the ups and downs of the market. But it can be counterproductive because risk can also be an opportunity.
Being too careful with your direct debit investments can be a mistake. Clients might think that once they retire, they can no longer make investment decisions or take more risks. But it can also cause your draw pot to run out because it doesn’t make the most of the investments available to you.
If you retire at 65, you can normally expect to live another 20 to 22 years on average. This is still a long time to invest and it means that you can potentially take more risk with part of your pension than you might think.
The risk shouldn’t be all or nothing either. Building a diversified portfolio of investments spanning a variety of different types of investments, geographies, markets and sectors can help.
The important thing is to find the right balance between taking enough risk to achieve your goals, so that your fundraiser lasts, and not taking more risks than you are comfortable with.
Learn more about the risk
Get help with your retirement income
You don’t need to revisit your retirement plans if you are unsure whether or not you are making these three common mistakes.
Sometimes it’s the simple adjustments that can make the biggest difference.
But it can be difficult to fine-tune your retirement income, plans, or even adjust your investments if you’re not sure how they fit into your current or future lifestyle goals.
You also don’t have to do everything yourself. You may find that talking to an advisor about your retirement can help you reach your goals. Or if you’re not sure how long your retirement income will last, an advisor can help you put a plan in place. They will understand where you are now, where you want to be and how to get there.
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They won’t give you personalized advice themselves, but they will help make sure the advice is right for you and that you are comfortable with the fees involved.
If you agree, they will put you in touch with an advisor within two working days.
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