Plan your retirement fund to make it last a lifetime

Improved life expectancy has its downsides, most notably the prospect of your retirement savings running out while you still live. We look at some of the strategies people can employ to ensure they enjoy a comfortable retirement for the rest of their days.

The challenge in retirement is not just to avoid running out of money; it’s helping people to enjoy a reasonable income while also retaining enough flexibility and security to navigate an uncertain future, says Ian Moynihan, director of propositions, Irish Life Employer Solutions. “A good retirement plan combines secure, reliable income for everyday essential spending, flexible invested savings to cater for unexpected or changing needs, and regular reviews as circumstances evolve.”

Professional advice is really important when putting a solid retirement plan in place, says Moynihan. “First, start by looking at the income you can depend on, secure sources like the State pension and any defined benefit pension or annuity you might have.

“Second, work out the cost of everyday essentials, the things you absolutely have to spend on, like your house, utilities, food, insurance and healthcare costs. Then, isolate the ‘nice to have’ costs, like holidays. The Pensions Council’s ‘Retirement Living Standards’ maps out three standards of living in retirement − modest, moderate and comfortable - and estimates the annual costs for each one. It’s a really useful reference for this exercise. The income you need to draw down is the difference between the costs you expect and the secured income you can depend on.”

For a really solid plan, Moynihan says you need to factor in rising life expectancy, inflation and periods of weaker investment returns to give you a good indication of what you can spend safely each year. “Lastly, your retirement income should be proactively managed, so it keeps pace with changing spending patterns and needs. Annual reviews and sense checks after major changes in markets, health, family circumstances or spending are key.”

Longevity and inflation are among the biggest challenges facing retirees, says Sinead McEvoy, head of retirement solutions, Standard Life. “People are living longer, meaning retirement savings may need to provide an income for 25 to 30 years or more. At the same time, inflation can steadily erode purchasing power, reducing what a fixed income can buy over time.

“Investment returns are also important, particularly where pension savings remain invested in retirement. Market volatility or lower than expected growth can affect how long retirement funds last. In addition, unexpected expenses, including healthcare and long-term care costs, can place further pressure on retirement finances.”

There is no single “safe” withdrawal rate that will work for everyone, says Olive Reid, head of account management, corporate pensions, New Ireland. “The starting point should be the income you actually need, taking account of essential expenditure, discretionary spending and other sources of retirement income, including the State pension where applicable. Spending needs are also likely to change throughout retirement, with discretionary spending often higher in the early, more active years.”

The focus typically shifts from maximising growth to balancing growth, security and income when it comes to investment mix, says McEvoy. “Retirement doesn’t necessarily mean moving everything into cash or low-risk investments.

“Many people will spend two or even three decades in retirement, so retaining some exposure to growth assets may remain important to help combat inflation and support income needs in later life. The appropriate investment mix will depend on factors such as spending needs, risk tolerance, health, family circumstances, and other sources of retirement income.”

One mistake Reid sees people making is assuming that avoiding market risk altogether means avoiding risk. “Moving everything into very low-risk assets may reduce short-term volatility, but over a long retirement it can increase exposure to another risk: inflation gradually eroding purchasing power.

“Another is considering risk appetite without also considering risk capacity. Somebody may be comfortable taking investment risk but financially unable to withstand a substantial fall in their fund. Conversely, somebody with a low appetite for risk may have significant other income or assets and therefore greater capacity to withstand investment volatility.”

There is also the opposite problem of becoming so concerned about running out of money that people are reluctant to spend the savings they accumulated specifically for retirement, Reid says. “The objective shouldn’t simply be to preserve the largest possible pension pot. It should be to use those savings sustainably to support the retirement you worked for.”

Annuities, approved retirement funds (ARFs) and other retirement income products can each play a useful role in providing income for life and should be viewed as complementary rather than necessarily as an either-or choice, says Moynihan. “An annuity provides a known, reliable and secure income for life – helping to cover essential everyday spending and removing the risk of outliving that portion of retirement savings.

“An ARF offers flexibility – savings remain invested and can be drawn over time, with the potential for growth and the ability to pass remaining assets to beneficiaries, subject to the relevant tax treatment.”

For many people, Moynihan says a blended approach is worth considering – using secure income sources to meet core needs and retaining flexibility through an ARF or other savings for discretionary spending, future needs and legacy planning. “The choice is personal – and should be taken with professional financial advice.”

For many people there can be a worry that markets could fall significantly in the first few years after they retire, leaving them with much less of a pot. “This is something that should really be planned for before retirement, rather than being forced to react after markets fall,” says Reid. “A proper retirement plan will take account of the potential for market volatility, and should help to avoid making abrupt, fear-driven changes to a long-term investment strategy.

“Any response to a market fall should be considered within a broader plan, using defined guardrails, rather than improvised during a crisis. Damage often comes not only from switching out of growth assets after a fall, but from failing to reinvest at all subsequently.”

A solid retirement plan should ensure that near-term spending needs are held more cautiously to mitigate the risks associated with a market fall, says Reid. “A significant fall in markets may trigger a review with a financial adviser of spending, cash reserves, investment mix and the longer-term income plan – it shouldn’t mean abandoning the plan itself.”

The most important thing is to avoid making emotional decisions, says McEvoy. “A significant market fall early in retirement can be challenging because someone may be drawing an income at the same time their investments have fallen in value. The aim is to avoid a short-term market fall forcing a long-term decision.”

It’s not only market movements that can have an impact, she says. “Our Bringing Retirement into Focus research found that the proportion of retirees who felt financially ready fell from 67 per cent in 2022 to 43 per cent in 2023, during a period of significant cost of living and economic uncertainty.

“While that figure has since recovered, it shows how much the wider environment can influence the retiree experience. When difficult economic news dominates headlines, it can be hard to tune out that noise and maintain a longer-term perspective.”