Almost everyone will at some stage begin to worry about whether they have saved enough for their retirement. Very few people are wealthy enough to escape that concern.
It is not, however, an easy question to answer.
To start with, you need to work out how much you are going to need, based on what you are currently spending. Then you are faced with the problem of working out how much of an income you are able to earn from the money you have saved, and whether it’s enough to cover that need.
The difficulty with this is that retirement savings are almost always shown as a lump sum. How do you know what that represents in future income?
According to divisional director for product development at Liberty Mark Lapedus, this is currently one of the biggest issues with retirement savings.
“Back when everyone received a pension from their employers, they would get 70% or 80% of their final salary,” he explains. “Everything was calculated in terms of income. But over time we have lost that focus.”
With the move from defined benefit to defined contribution funds, people are in charge of their own
retirement savings, and they concentrate almost entirely on the capital they are building up. But how do they know what it’s really worth in terms of a monthly income?
“Every person saving for retirement is saving for the same goal, which is to replace the income that they are no longer going to have,” says Lapedus. “Yet most people save for a lump sum and forget about what really matters. They don’t often enough translate that lump sum back into an income to determine if they have enough.”
What makes this even more challenging is that there is no easy set of rules you can use to work out how much income you can get from a certain amount of capital. There are a lot of variables at play.
“Most people will be putting away a certain amount of money every month, assume that is going to grow at a certain rate, and calculate that when they get to retirement they will have a certain lump sum,” says Lapedus. “But how are they deciding what that lump sum will be worth?”
If you intend to use your money to buy a guaranteed annuity, what rates are you using? You can work off what is being offered by insurers today, but annuity rates may be significantly different by the time you reach retirement. Since interest rates fluctuate and because life expectancy will change, you can’t accurately predict what life insurers will offer you.
Even if you decide to use an investment-linked living annuity, you face the problem of not knowing what will happen in the markets. You don’t know what returns will be like or what will be a sustainable draw down percentage in the future.
Once again, you might benchmark against what is relevant in today’s markets, but the environment may be completely different at the time you retire. And the further you are from retirement, the less certainty you have.
One way to mitigate this is to consider retirement saving options that don’t just accumulate a lump sum, but rather guarantee a future income. These products remove these variables.
“From Liberty’s point of view, this is the need we wanted to address when we launched the Agile retirement annuity with the Exact Income Fund,” says Lapedus. “With a portion of your savings you can secure an income, regardless of what happens to markets or interest rates. This may only be part of your final solution, but at least it will provide you with some measure of certainty.”
To retain some flexibility investors may prefer to use this in conjunction with other options, but at least a product like this removes some of the anxiety of not knowing what your money is actually worth. What you have saved is always shown as an income in today’s terms, giving you some sense of where you really stand, and if you really have enough to retire.
Brought to you by Liberty.