Helping clients maintain their income
Retirement should always be a time for relaxation and leisure. After working all of your life, either in education or career, you deserve to spend retirement fulfilling your goals and dreams. The last thing that you should be doing is worrying about whether your Investments and Pensions will run out. Unfortunately, this is something most retirees are concerned about, and a lack of planning can lead to many outliving their savings.
This is where our Income Sustainability Review can help.
What is an Income Sustainability Review?
For all our clients that are either approaching or already in retirement, our annual review process is enhanced to include an Income Sustainability Review. This aims to give realistic and useful figures for how much can be spent in retirement without running out of money.
We use your data and a sophisticated modelling tool to give the following outputs as part of the review:
- Sustainable Rate of Spending – this figure tells you how much you can spend each year until your life expectancy so that in 85% of cases, you will not run out of money. Read on to find out how this figure is obtained.
- Capacity for Loss – this looks at the worst-case scenario in terms of investment returns (based on 100 years of historical data) and states the income you can afford to take in this situation.
- Next 12 months – this details your income expectations and expenditure requirements for the coming year. We then recommend how to meet any shortfall that may occur. Since this exercise is done every year, it gives peace of mind that your expenditure will be covered for the next 12 months. We provide gross income figures and estimate your net income based on our knowledge of your tax situation.
- Best, median and worst scenarios – these three are shown on a graph and detail the amount of money left in your estate at your life expectancy in each of the three scenarios. This is based on 100 years of historical investment returns and your current and future spending levels.
As part of the overall review, you will receive a report detailing these figures. Also included in the review are any updates to your financial objectives, risk profile and whether your investments continue to be suitable for your situation.
Following the review, we may recommend that certain actions are made to ensure you maintain on track to meet your objectives. To supplement the report, you will receive a ‘Retirement Income Statement’, which is taken from the modelling tool and delves deeper into the statistics behind your forecast.
How are these figures calculated?
In order to make the forecasts as accurate as possible, we input a large amount of data into the system. The tool has a large amount of historical data built in so that the modelling has the best chance of being realistic in the future. The key variables are:
- Predicted expenditure – we take these figures from you based on your spending levels and always discuss how you imagine your expenditure may change throughout your retirement.
- Income sources – in addition to withdrawals from investments, there are often additional income streams to consider. Most people have state pension benefits, and there may also be final salary pension schemes, rental income or part time work to consider as well.
- Life expectancy – this is calculated using your current age and longevity statistics as a starting point. We then prefer to plan for you to live longer than this to minimise the chance that you outlive your finances.
- Existing investments – we have the ability to input your exact investments so that the tool can use your asset allocation to more accurately predict future investment returns. The last 100 years of investment returns data is considered when producing the forecasts.
- Inflation – the level of inflation can make a significant difference to the success of your plan, particularly over a longer period of time. In a similar way to life expectancy, we like to build the forecast assuming a slightly higher average inflation rate to avoid unsavoury surprises further down the line. Based on inflation over the last 50 years, the average is in the region of 4%, so this is the figure used during the simulations.
- Legacy – this is the amount you would like to leave to your love ones when you die. For some, this may be £0 so that we plan for you to spend all of your money. However, others may want to ensure each of their children receives £100,000, for example. We can adjust this figure in the system and it factors this in when estimating your sustainable income levels.
As previously mentioned, the key output from the review is the Sustainable Rate of Spending. This tells you how much you can spend each year until your life expectancy so that in 85% of cases, you do not run out of money. The 85% figure is based on the historical returns data that is built into the system. Whilst we would love to use a figure closer to 100%, this would give a spending rate that is extremely low. Furthermore, for those clients wanting a guaranteed income for the rest of their lives, an annuity purchase is the best option. Read more about your retirement options here.
Your Income Sustainability Review is conducted each year so that your plan can be monitored and ensure you remain on track. The modelling tool automatically updates daily and notifies us if a client’s success rate falls below 80%. Therefore, we feel that providing a spending rate that gives 85% chance of success is the correct balance.
Why do you not use Sustainable Withdrawal Rates?
Sustainable Withdrawal Rates usually only apply to pensions. A Sustainable Withdrawal Rate is a rate of income that you can take each year from your pension without running out of money before you die.
Most people have income from more than one source, so to ensure our clients can maintain their standard of living through retirement, we prefer to consider all of our client’s savings and investments. If your pension runs out before you pass away, your other assets can provide you with income. Therefore, the Sustainable Rate of Spending gives a single figure that encompasses all your sources of income, investment accounts, pensions and ISAs.
This valuable service can allow you to relax in retirement knowing that you will not run out of money. Let us do the worrying for you whilst you tick items off your bucket list.
If this sounds like something you would be interested in, please get in touch with us today to book your free initial consultation.