During your working life, it’s important to focus on building adequate wealth for retirement. We can give you guidance here and help you contribute a suitable amount to your pensions and ISAs. We’ll also support you in building an investment portfolio.
With careful planning and professional guidance, you can grow your savings so you’re able to afford your dream lifestyle in retirement.
However, building your savings pot is only the first step. Once you make the transition to retirement, you enter the decumulation phase and begin drawing from your savings to fund your lifestyle.
Drawing a sustainable income from your retirement pot can be challenging and many retirees have concerns about making their savings last.
That’s why Which? reports that 51% of over-55s are worried about running out of money in later life.
There are several hurdles you could face in later life that might make you more likely to spend your savings too quickly and face financial difficulties.
Fortunately, if you plan for these eventualities, you can take steps to protect your savings.
Here are three decumulation dilemmas you might face and how you can deal with them.
1. Increasing life expectancies
As healthcare and our general lifestyles improve, average life expectancies are increasing over time. While this is positive news, it could create challenges in retirement because you may need to fund your lifestyle for longer.
According to the Office for National Statistics (ONS), a 50-year-old woman has an average life expectancy of 87, with a 7.6% chance of living past 100. A man of the same age has a slightly lower life expectancy of 84, and a 3.8% chance of reaching 100.
As such, if you were to retire at 60, it’s increasingly likely that you’ll need to fund your lifestyle for more than 20 years, perhaps even 30.
It’s also important to note that the latest ONS figures show “healthy life expectancy” – the number of years you live in good health – is much lower than overall life expectancy.
Between 2021 and 2023, men in England had a healthy life expectancy of 61.5 years, and women could expect to spend 61.9 years in good health.
Consequently, while you may live longer, this could mean you’re more likely to face health issues and require expensive later-life care for a longer period.
To overcome this hurdle, it’s important that you don’t underestimate your life expectancy when planning for retirement.
In fact, you may want to overestimate your longevity slightly. That way, you can ensure you have a realistic savings target and build adequate wealth in the lead up to retirement. You may also need to consider the potential cost of later-life care and build additional savings to account for this.
Further to this, it’s important to create a detailed retirement budget so you only draw what you need from your savings and avoid overspending. This could make your retirement pot last longer.
We can discuss your retirement lifestyle with you and determine what you’re likely to spend each year. Then, using cashflow forecasting, we can estimate what level of savings you might need to maintain that lifestyle throughout retirement, using realistic projections about your life expectancy.
If you’re concerned that your savings pot is not large enough to fund your retirement as life expectancies increase, we can explore ways to build your savings.
2. Inflation eroding the real-terms value your savings
While you may have a healthy savings pot for retirement, it’s important to consider whether inflation could erode the real-terms value of your wealth. If you don’t account for inflation, you may be more likely to run out of money during retirement.
This is because, as the cost of living rises, you may need to draw more from your savings to maintain the same quality of life.
For instance, you might calculate that you need to spend £30,000 a year to cover all your expenses.
However, if inflation is 5%, the same goods and services that cost £30,000 a year ago will now cost £31,500. As such, you’ll need to draw slightly more from your savings if you don’t want to sacrifice your lifestyle.
If you’re funding your retirement for decades, inflation could mean that your expenses increase significantly in that time. For example, the Bank of England (BoE) inflation calculator shows that £30,000 worth of expenses in May 2015 would have cost £41,525 in May 2025.
When determining how much you’re likely to spend in retirement, it’s crucial to consider inflation and plan for the fact that you may need to increase withdrawals from your savings in the future.
Again, cashflow planning can be helpful here as we can factor in inflation when creating our forecasts.
Additionally, it’s important that any pensions and investments you have are growing steadily, so your savings keep pace with inflation over time. We can help you review your pensions and investment strategy to ensure you achieve the necessary growth to maintain your spending in retirement.
3. Market volatility affecting your retirement pot
When you draw flexibly from a defined contribution (DC) pension, the rest of your savings remain invested, and may continue growing over time. This might benefit you as any growth you achieve could dampen the effects of inflation.
However, periods of market volatility may affect the size of your retirement pot, meaning you spend your savings faster.
This is because if the value of your investments falls, you will need to sell more units to maintain the same level of income. As such, you might deplete your savings faster and could potentially face a shortfall in later life.
The effects of market volatility could be especially challenging at the beginning of your retirement as you must fund the remainder of your retirement with a smaller savings pot.
Fortunately, there are ways to deal with this problem.
If you have savings from other sources, such as an ISA, you may be able rely on this wealth to fund your lifestyle during a market downturn. When markets recover and the value of your investments increases again, you can continue drawing from your pension.
Even if you don’t have enough savings to cover all your expenses, supplementing your income could mean you don’t have to draw as much from your pension, so you don’t deplete your pot as quickly.
You might also consider making temporary cutbacks to your spending when markets are in turmoil, so you can continue drawing sustainably from your pension.
We can help you review your budget and decide on a suitable level of income to draw from your savings. Additionally, we can assess the investments in your pension to make sure they’re well-diversified and able to better withstand a period of market volatility.
Get in touch
Whether you have already retired or are planning ahead, we can support you with these decumulation challenges.
Please get in touch or email us at advice@mlifa.co.uk for more information.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The Financial Conduct Authority does not regulate cashflow planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.