As your pension will provide the bulk – if not the whole – of your income during retirement, it is essential you research the market thoroughly to ensure you have the best option for your needs.
But first things first, when it comes to your retirement, it’s important to never rush any actions you are not sure about.
The biggest mistake is not doing nothing – it’s doing the wrong thing – as many decisions you will need to make around this time are not easily reversed.
Do you need to act now?
You need to ask yourself if you currently need to act. There is no need to take pension benefits immediately, and as such, you may wish to defer your income. The longer you leave your pot invested; the more chance it has to grow.
If you are considering purchasing an annuity, you should shop around to find the best product for your needs – as many providers offer higher income for smokers, for example.
The results of shopping around can be dramatic: Research from Nationwide building society suggests that by seeking an alternative annuity from what is offered by your pension provider, you can increase your income by up to 20%.
If you have one of the larger pension funds, you could also consider income drawdown. Capped drawdown can be changed year by year, and as such you can change your income to suit your needs.
In addition, as the remainder of your pot is still invested, you can see greater returns if your investments are successful.
Do you have enough capital saved?
If you have not done so already, it’s a good idea to work out how much money you will need to enjoy your golden years.
There are two main methods you can implement to see if you’re on track for a comfortable retirement.
Arguably the easiest; the cash-flow analysis method sees you calculate what your annual expenses will be during retirement, then multiply that figure by the number of years you potentially need to fund.
If the total of all your sources of capital exceeds the calculation’s figure, you’re in good shape as you head towards retirement.
If it is easier, you may also want to look at the “replacement rate” method – where you calculate your current yearly average expenditure, then use this to see how much of this you will need for each year during retirement.
Whilst a study by UBS Wealth Management Americas shows investors expect to live off 58% of their prior annual income, industry professionals recommend 75% to 80% for a comfortable retirement.
If you are not comfortable calculating these figures, an independent financial advisor will be able to help you plan how much you need to save for retirement – and should also be able to help you find products and/or services which suit your needs.
The importance of over-estimation
People approaching their retirement are often significantly under-prepared, and overestimate the standard of living they will be able to enjoy during retirement.
If you completed the calculations above and believe you may fall short, there are several options available.
One of the most risky is choosing to diversify your assets into high risk (and therefore high return) investments. However, it is generally not advisable to place any unnecessary risk on the money reserved to fund your retirement, as investments do not only go up, they go down.
Many people approaching retirement are therefore now embracing the fact that passing age 65 may not mean their total exit from the workforce.
Indeed, older adults are currently the fastest-growing work bracket within the American workforce – and people aged 55 and up are expected to comprise 25% of the labour force by 2020.
To fully evaluate your financial situation, and discover the best options to fund your retirement, consulting with an experienced financial professional is of paramount importance.