Do I have sufficient financial assets to last a lifetime? Hand on heart, I do not know – and I imagine I am not alone in my financial ignorance. Few of us know whether we have enough wealth stored away in our pensions, savings accounts and home to last until our dying day.
All understandable, because there are so many imponderables. For a start, we have no idea how long we will live – although you can get an idea if you so desire by completing an online life expectancy survey. The last time I did that, I was told I could expect to live until age 81 without a heart attack or stroke. Given a friend of my younger brother recently died in his mid-50s without warning – he was playing cricket at the time and from the outside he was as fit as a butcher’s dog – I am not counting my chickens.
Nor do most of us know how long we will work for. Redundancy or ill health can strike at any time, while many people are opting to work long past the traditional retirement age of 65, even if it means going part-time. In my profession, journalists rarely retire and keep on writing long into old age, even though they might not be well remunerated for their efforts. It is a route I will surely walk down as I head for my final sunset. Working more for less.
This difficulty in calculating whether you have enough money in the proverbial personal finance tank to see you through to the end was analysed in a recent report from the august Institute for Fiscal Studies, an organisation renowned for its forensic examination every year of the numbers behind the Chancellor’s Budget.
Convention suggests that most of us do not prepare adequately for retirement. We simply do not save enough, through tax-efficient pensions, individual savings accounts (Isas) or other means. Yet the institute’s report, The Use of Wealth in Retirement, concludes this is not necessarily the case. It argues that a far bigger issue is the failure of many people to use the assets they have accumulated during their working lives to improve their retirement lot.
In other words, rather than spend a large chunk of their pension on themselves or release equity from their home to generate retirement income, they would rather cling on to their assets. Some of them, the institute argues, adopt a siege mentality because they mistakenly fear they will need their assets to pay for care or nursing home fees in later life. As a result, they squirrel rather than spend. So, rather than dying destitute, they end up going to the grave with wealth that gets handed down to children and grandchildren.
“Do not be scared to use your assets for yourself”
Indeed, new pension freedom rules introduced three years ago by the then Chancellor, George Osborne, are perpetuating this squirrelling impulse. Given most people are no longer using their retirement pot to purchase an annuity – a lifetime income – they are sitting on their retirement funds. Stymied into inaction.
I have three final thoughts on making your money last a lifetime.
First, save as much as you can into a pension while you are working. I have a pension pot that I add to on a regular basis, aided by a nice monthly top-up from my employer. There are no guarantees, given it is exposed to the vagaries of the stock market. But I am depending on it to provide the hub of my retirement fighting fund. Your employer is probably equally generous when contributing into your pension on your behalf. Take advantage. If you can, support this pension fund with contributions into an Isa – preferably one that is investment rather than deposit based, giving your money the chance to grow.
Second, do not be frightened to use your assets for your financial and spiritual enrichment in later life – and do not rule out releasing equity from your home to generate retirement cash. It is a move my parents made towards the end of my father’s life and it gave them financial empowerment. My mother is also assured she can live in the family home until her dying days.
Finally, if you are worried you might run out of money, speak to an independent financial adviser (IFA). Most of them now have access to computer-based cashflow models that will calculate whether your finances will last a lifetime. Like the online life expectancy survey, they are not 100% reliable. But they can provide comfort and an assurance that things will be all right in retirement.
JEFF PRESTRIDGE is the personal finance editor of The Mail on Sunday. He won the Contribution to Personal Finance Education category at the Santander Media Awards 2016. Email him at firstname.lastname@example.org.