Hopefully, you head into retirement confident in your finances and your retirement income. While your financial commitments and dependents may be fewer in retirement, it’s still important to have a safety net to fall back on when you need it most.
According to a report in Money Age, 49% of those aged over 65 describe themselves as in “excellent” or “good” financial shape. Yet just 21% think they have plenty of money set aside for emergencies, which could leave the remaining people exposed to financial shocks.
While an emergency savings account isn’t something you use day-to-day, it plays an important role in your financial security. Ahead of retirement, you may have paid off your mortgage or no longer be supporting children. So, maintaining an emergency fund may have slipped down your priorities.
Maintaining a rainy-day fund can help ensure you remain financially secure, even when the unexpected happens.
How much you should have in your emergency fund depends on your circumstances. As a general rule of thumb, it’s a good idea to have three to six months of outgoings in an easily accessibly account to tide you over when it’s needed most. As you want to be able to access these savings as soon as you need them, a cash account makes sense for most people.
Planning for unexpected expenses
Your expenses might go down in retirement, but the unexpected can still happen. From a roof needing repairs to a boiler breaking down, you never know when you might need to dip into savings to cover unexpected costs. Having an emergency fund means you can rest assured that you’ll be able to cover these expenses should you need to.
Keeping an emergency fund ready for these circumstances can help ensure your retirement plans stay on track.
Providing a safety net against market volatility
As a retiree, it’s not just unexpected costs that can affect your income. You may be withdrawing an income from investments and market volatility could have an impact.
If you’ve chosen to access your pension through flexi-access drawdown, the value of your pension can also be affected by investment performance. With flexi-access drawdown, you can take a flexible income to suit you. The remainder of your pension will usually remain invested. As a result, the value will rise and fall.
If investment values fall and you continue to withdraw the same income, you’ll have to sell more units to achieve this. This means you could deplete your pension or investment portfolio quicker than you expected, and no longer have enough to maintain your standard of living for the rest of your life.
Having an emergency fund you can use amid market volatility, such as that experienced in 2020 during the first Covid-19 lockdown, means you can reduce the amount you withdraw from your pension. This means you won’t have to sell units when prices are low. Historically, markets have recovered from volatility and investment values have risen following dips. While guarantees can’t be made, having a financial buffer can help you ride out short-term volatility and minimise the long-term impact.
Managing pension investment risk in retirement
As well as having an emergency fund to fall back on, there are other steps you can take to manage the impact of market volatility on your pension and retirement income.
Leaving your pension invested can make sense, but it’s important to understand that it does come with risks. By leaving your pension invested, you’re providing it with a chance to grow over the long term. With average retirement lasting decades, you can still benefit from long-term investment trends to help your pension go further.
If you choose this option, one thing you will need to consider is how much investment risk is appropriate for you. This should consider a range of factors, from what other assets you hold, to what your goals are. If you’re not sure how much risk you should be taking with your pension, please contact us.
Remember, flexi-access drawdown isn’t your only option when taking an income from a defined contribution (DC) pension either. If you’d prefer security over flexibility, an annuity can make sense. An annuity is something you buy with a lump sum, which then provides a guaranteed income for life. In some cases, the income delivered from an annuity can be linked to inflation to preserve your spending power. This means you won’t need to worry about investment volatility affecting your income.
Whether you’re nearing retirement or are already retired, it’s important to have confidence in the choices you make. We can help you understand what your options are and how to mitigate risks, including creating an emergency fund.
Please note:
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment 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.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.
Richard Fyfe is a Chartered Financial Planner and a Director of Fyfe Financial.