Introduction
Investing in retirement is a subject of much scholarly research, strong opinions and, in my not-so-humble opinion, a whole boatload of crap information. My job is to cut through all of that and give you the stuff you really need to know and do to invest successfully in retirement, so that you don’t have to wade through all that stuff, if you don’t want to that is.
Inflation is the Silent Killer
It is so important that everyone planning to retire, or achieve FI – however you want to put it – understands just what a massive deal inflation is in retirement. We spend most of our time not worrying about inflation too much, particularly while we’re working, for a couple of main reasons as I see it.
Firstly, wages generally increase ahead of inflation, so we earn a little bit more in real terms each year. Yes, I know that millions of public sector workers are now cursing me – I know that by and large you don’t get super-inflationary pay-rises, and I agree that it’s wrong. But let’s stay focused on the point here.
If inflation is at, say, 2%, meaning everything is 2% more expensive this year compared with last year, and if you get a 3% pay rise, then you’re 1% better off, are you not? This means that for most of us, while we’re working, we don’t pay much mind to inflation because we’re beating it.
That is very often NOT the case when we’re retired. Secondly, the stuff we tend to buy more of when we’re retired is often itself super-inflationary – food and fuel being the main budget lines for many retirees.
I know this is hugely generalising. Not everything goes up by a uniform rate of inflation. Some things get cheaper and some things more expensive. When we talk about inflation we’re averaging, and the government uses a standard ‘basket’ of consumer items and services to find the average.
Also, we’re all different. You might buy more stuff that goes up in cost than I might. We each have a personal rate of inflation which if we didn’t have a life with real people and interests in it, we could probably work out easily enough.
Most of us, when we retire, have one main source of pension income which is indexed, which rises over time in a bid to keep pace with inflation. That’s the state pension, and for many of us it will form the bedrock of our retirement income, which is good.
But for most of us, and for an increasing amount of us in future, we won’t have any indexed (rising) sources of income after that. Defined Benefit schemes are called the gold standard for this reason among others: the income benefits are indexed.
If instead we have a collection of DC pensions pulled together throughout our working life, we have a pot of money which now has to last us the rest of our lives. And for many of us, that’ll be quite a long time. The ONS longevity calculator is a good tool – try this for yourself.
I put in that I was 60 years old (I’m not, I’m 45 and looking well on it, I’m sure you agree.) A 60-year-old bloke like me has an average life expectancy of 85. There’s a 1 in 4 chance I’ll live to 92 and a 1 in 10 chance I’ll get to 97. Let’s take the average though and say I drop dead when I’m 85, exactly 25 years after I plan to retire at age 60.
Let’s say I want to spend £40,000 per year rising by 3% inflation for every year I’m retired. In my last year of retirement my lifestyle will cost about £84,500, more than twice what it started at. If I live for thirty years that figure will be about £113,500, nearly three times the original annual amount.
Now if I have just a small portion of my needs covered by my state pension and the rest of my life has to be funded by a finite pot of money, then I really do need to invest wisely. Let’s not mince words here.
The risk of running out of money in later life is a way bigger risk than your Tesla shares tanking or losing some money on Bitcoin. Inflation is pretty much a given; it’s not a risk, it’s a certainty. And so we need to give ourselves the best chance we can of beating it.
I’m finding your advise videos very interesting and i hope you can help with my situation and predicament ! I’m 60 and retired 4 years ago and i’m living off my savings! I’m not married and have no dependents.
I have just recently started investing, outside a DC pension (january 2022), for the first time after decades of fixed cash isas and fixed cash bonds. I decided on a S&S isa in VLS60 with Vanguard. As of today i’m c. 9.27% down on my £21,500 contributions and dont know whether or not to a)
continue drip-feeding for the rest of the tax year; b) dont make any more contributions OR c) put in this years isa allowance in full.
I also have a ‘with profits’ personal pension with Royal London with the latest value of £38,200. I have neglected the pension over the years, admittedly, and only made monthly contributions of £40 since i started it in 1994. However, when the rules on pensions changed about 9-10 years ago i decided to keep it and then increased my contributions to my maximum of £240 per month (also this january!) to also gain from the tax relief. It has performed quite well these last few years and i was very surprised that the latest value is +11% up since April 2021, even after deducting contributions, despite all the negativity regarding inflation and rising interest rates etc. There are no guarantees on the pension however and the final bonus is also not guaranteed!
The rest of my money is in cash , c. £138,000.
I’m forecast to receive a full state pension of c. £9600 per year at 67 and this is the maximum i can receive after 40 years national insurance contributions.
I own my home with no mortgage!
So, i’m in a reasonable situation but dont know whether to put in the rest of this years isa allowance, ie. £18,500, in my VLS60 meaning i’d then have a total of £40,000 in an S&S isa which i’m planning on leaving for ten years (up to 2032-2033!). That would leave me with about £120,000 to live on for about 6.33 years before my state pension kicks in.
Regarding my Royal London pension; for me to increase contributions it was stipulated that it should be left for a minimum of five years. So, from 2027 i can use any of the usual options; ie; drawdown, 25% tax free, take the lot, annuity etc. I was planning to take it eventually in a way that keeps any drawdown below my personal allowance each year to avoid paying tax. By that time i’d hope to put any fixed cash savings in isas as well as having the S&S isa.
So, can you give any pointers in my strategy or pinpoint any potential downfalls. Indeed what if the VLS60 doesnt perform as expected and continues losing money? I do know , for instance, that the 40% bond proportion isnt providing the income or protection against falls in the equity markets that it once would have and that this is likely to go on for a few years yet. I’ve been led to believe, rightly or wrongly, that VLS60 left for c.10 years should be long enough to get a real return of keeping up with inflation or 1-2% over inflation!
The reason i chose the VLS60 was that it was the kind of set and forget mixed index fund that i could just leave and let it do its thing, albeit it is over-weighted toward the UK. But now i’m unsure! When ive asked questions on money saving expert forums and even people i know theyve all said that i dont need an independent advisor from a wealth management firm as the fees would take a 1.5-2% chunk of the profits each year and they would only point me in the direction of index funds, etf’s, IT’s etc that i could decide on myself?
And my with profits pension with Royal London is doing ok but theres no guarantee that that wont also fall in value!
Thanks for reading, and i hope you can give me some pointers!
regards, Andrew
Hi Andrew, Well done on being intentional with your money. At Meaningful Money we are unable to provide financial advice but if you are looking for an adviser, then you can get in touch with Pete at Jacksons by clicking on Work With Pete.
Try to avoid timing the market. If putting in a lump sum of money and experiencing an initial large loss frightens you, then drip feeding in money over a period of a few months may help be feel more confident.
The following videos may be useful:
https://meaningfulmoney.tv/2021/11/18/do-you-need-a-financial-adviser/
https://meaningfulmoney.tv/2021/09/02/7-beginner-investor-mistakes-and-how-to-avoid-them/
https://meaningfulmoney.tv/2022/03/07/how-investors-should-respond-to-the-invasion-of-ukraine/
And this podcast episode is aimed at investors who are near or in retirement:
https://meaningfulmoney.tv/2021/01/06/the-ultimate-guide-to-investing-in-retirement/