Retirement is as much about money as it is about lifestyle. Whilst we are advocates of prioritising your values and interests, it is difficult to achieve a fulfilled retirement without the capital to fund it. When you think about what a happy retirement looks like for you, perhaps some of the following come to mind:
Moving home
Travelling the world
Spending more time with family
Spending more time with friends
Dining out
Playing sport
Volunteering for charity
Home or garden renovations
Spending time outdoors
These are all rather enjoyable activities but, ultimately, cost money. It is crucial to understand how you want to spend your new-found time in retirement and it is also important to work out the income you will need to pay for the kinds of activities that fill your days and week. That is on top of your usual overheads.
This doesn’t need to be a stressful exercise, though.
At Stephen Eve Financial Planning, we have developed a specific approach to managing money in retirement.
The Stephen Eve approach
Our lead financial planner, Ben, recommends creating Short, Medium & Long-Term ‘pots’ or ‘buckets’ of money which you can access at various stages in retirement.
The first bucket
For years 1 – 3 of retirement
Accounts for 3 years’ worth of your average spending
Ensure this is a low risk investment because you are likely to want to draw down on this, taking an income from the capital here to fund your day-to-day life. If the market is volatile and you need to draw money on a ‘down’ day where stocks and shares have reduced in value, you may lose money. Placing your short-term cash in a low risk investment avoids this scenario.
It’s also important here to factor in any large expenses you foresee happening in the imminent future.
Types of investment to consider - cash accounts such as Premium Bonds, Savings Accounts, Cash ISAs, or Fixed Interest Securities
The second bucket
For years 3 – 10 of retirement
Accounts for 7 years’ worth of your average spending
You can afford to place this capital in a medium risk investment fund since you are unlikely to draw from it in the near future. Generally, higher risk funds perform better but only if they are diversified (explanation below) and you leave money in there for a substantial amount of time to allow the market to recover and subsequently perform well.
Diversification is an investment strategy used to manage risk, based on the premise that a portfolio with different asset types will perform better than one with few. We have written more about this here.
Types of investment to consider - typically money in the second bucket would be managed by a financial planner and is likely to have between 40-60% in stocks and shares, with the remainder in fixed interest securities. The amount you place in stocks and shares will align to the amount of risk you want to take. Depending on your position, funds could be held in a variety of tax wrappers such as ISAs and pensions.
The third bucket
For the rest of your lifetime spending, from 10 years post-retirement
It is hard to plan how much money you will need for the rest of your lifetime, few of us know what the future holds. But this is where cash flow planning is extremely useful.
Cash flow planning looks at your average spending vs. your total asset portfolio and allows us to picture either a) when you will run out of money or b) whether there will be a surplus in your lifetime. As well as average day-to-day spending you can plot in big figure items, for example, a holiday, new car, property or ‘what if’ scenarios like needing to pay for care.
This bucket should be the highest risk investment strategy. Since 1993, world equity markets have generally prospered. If you invested $1 in July 1993, this would have grown to $5.23. If you re-invested the dividends (which we recommend) that equates to an annualised return of 7.50%. Source: HUM. So you can see how, when you are able to leave an investment to do its thing, you can maximise your return.
However, this is only for the long-term. Studies have shown missing the 10 best days in the market over 20 years can reduce your return by up to 50%. You can read more on that here. So it’s important that any high-risk investment is untouched, and you draw money from elsewhere for as long as possible. Good job you have your short and medium terms buckets above!
Types of investment to consider - again, typically, this bucket would be managed by a financial planner. At Stephen Eve, we suggest a diversified global equity fund. As in the second bucket, funds will be held in a variety of tax wrappers such as ISAs and pensions.
Draw down from the lowest risk portfolio
Think of the three buckets like a waterfall. The first bucket is where you spend from initially and, at each review, we will recommend cascading funds down from either the second and third bucket. All of this depends on market conditions, your preference for regular or ad hoc income, and the tax consequences of the investments you hold. The reason being, you do not want to draw down from a high risk pot such as the second or third buckets since their value could increase or decrease day by day. Given this, we always suggest taking advice to maximise your income throughout retirement.
If you take one thing away...
In summary, when planning for retirement and actually during retirement, it’s wise to have two ‘heads’ on – your lifestyle head and your money head. Consider what will make an enjoyable retirement for you and then how that should be funded. You can also benefit from looking at the short term, all the way to 10, 20, 30 years’ time. Live for the day, ensuring the present is comfortable (and fun!) whilst keeping an eye on the future to put you in the best stead for the later stages of retirement.
Further reading
For those who want to learn more about retirement planning, we have blogs on a variety of topics:
Cash flow planning for retirement – How understanding your cash flow and affordability can give you the clarity and confidence to spend.
Mentally preparing for retirement – The mindset shift of earning money to relying on investment and how to ensure you have purpose once you finish work.
This content is for information purposes and should not be treated as financial advice. We would always recommend speaking to a professional before making decisions regarding your wealth.
The value of investments can fall as well as rise and you may not get back the amount originally invested. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. Even a long-term investment approach cannot guarantee a profit.
