Many of us look forward to retirement with the anticipation of relaxing, travelling, and enjoying life at a slower pace. Achieving the lifestyle you aspire to in retirement depends on your planning, pension funds and other investments, and whether they will generate sufficient retirement income to allow you financial freedom.
It is common to underestimate the value of savings or regular income necessary to enjoy a long, healthy retirement and have enough of a buffer to cover your living costs and outgoings for the rest of your life. You may also have other priorities, such as supporting family members, or helping with education costs.
Even if you consider your assets and portfolio substantial, reviewing the ongoing costs, returns, and available income is important, with careful management key to sustaining your wealth while generating the income you require.
Retirement Income Streams
We may automatically think of pension funds when considering how we expect to pay for our retirement. Pensions can be a secure, long-term investment vehicle with a broad range of categories, payout structures and tax implications to build into our plans.
Those planning for retirement might also consider a wider range of options, including:
- Investment assets
- Property income
- Savings accounts
- Business ownership
- State pension income
- Part-time work
The first step is to estimate your required annual income and then work backwards to calculate whether your existing funds or anticipated income streams match or, ideally, exceed the wealth you require to finance your plans.
Further guidance about calculating your required pension savings is available through our previous publication, How to Have Enough Money for Retirement.
It is unlikely that your retirement account alone will be your only income source. Having several assets can be a good way to diversify, ensuring that one adverse occurrence will not impact all your assets or financial products.
Varied savings, investment and pension products will also deliver different rates of return, so planning should account for interest rates, estimated returns, and whether your pension funds have a verified payout value or are liable to fluctuate.
Comparing Pension Products
Not all pension products are equal, and you should ensure you have a comprehensive understanding of the returns, benefits and terms attached to any pension fund you are relying on as part of your retirement income.
These considerations may be more complex for expats because a pension held in the UK, for example, carries risks if you draw income from overseas. Exchange rates can make regular pension payouts unreliable, and other factors, such as taxation, could influence your decision-making.
The main pension categories are as follows:
- Defined contribution pensions – the amount you receive depends on how much you have deposited into the fund, along with contributions made by an employer where relevant. The fund provider will manage your pension, and the value will depend on how the linked investments perform.
- Defined benefit pensions are considered valuable because they guarantee an income for life, usually based on your salary when in employment. The exact value will depend on your accumulated years of service, your average wage, and the benefits available through your specific scheme.
- Offshore pensions are designed for foreign nationals living abroad permanently or as dual citizens. They can act as a tax wrapper, which provides efficiencies, particularly if you wish to draw a lump sum from your fund.
Offshore pensions include several product types, including Personal Pension Plans, Self-Invested Personal Pension Plans (SIPPs) and Recognised Overseas Pension Schemes (ROPS), each with variable terms, advantages, and potential downsides.
Once you have established the nature of your pension fund, the forecast benefits, and whether the product aligns with your expectations, you can decide whether to consolidate, transfer or retain each product.
Any shortfall in your forecast income will need to be made up through other income streams or by diversifying your asset portfolio to ensure your projected returns will provide a stable, reliable income level for the years ahead.
Drawing on Your Retirement Income
Pension funds provide varying ways to access your income, normally with an optional lump-sum withdrawal of up to 25% of the value and/or regular pension payments. You may also be able to structure your pension according to your plans, drawing on larger amounts periodically if you do not wish to make monthly withdrawals.
Before making any concrete decisions, it is advisable to speak with an experienced expat wealth manager to ensure you are aware of your tax exposure and how this may affect your net income.
If there is a gap between your pension income and requirements, there are multiple approaches that may be suitable, whether reinvesting returns into new investments, adding new low-risk investments to your portfolio, or repurposing savings into products with higher returns.
The right solution depends on your retirement budgets and plans, so working through these in detail is time well spent to ensure any investment or pension-related decisions you make remain consistent with your expectations.
Retirees can also compare money management approaches, such as using a systematic withdrawal strategy. Rather than withdrawing all the returns available from their portfolio, they reinvest dividends and interest earnings to grow their wealth over the long term.
By drawing a monthly payment from their account, they maintain a baseline level of invested wealth but ensure they have a reliable income stream to cover outgoings. Below we summarise a theoretical example to demonstrate how this may work in practice.
- Investor A invests €100,000 in a fixed-term one-year savings product over ten years between 2005 and 2015 and draws 100% of the returns every 12 months. Depending on interest rates, their income varies from €700 to €4,210 annually, with a total return of €19,520 over the decade, retaining the original €100,000.
- Investor B diversifies their portfolio to minimise risk, receives around twice the returns, and protects their invested €100,000 from depreciation due to ongoing inflation. After ten years, the original €100,000 is now worth €198,126 – a considerably more attractive sum.
To ensure a steady income stream, Investor B initiates a 5% regular drawdown from their total fund. At the end of the ten years, they have not needed to withdraw anything further, have continually reinvested, and have a fund worth €158,680: a 58% growth on the original investment, in addition to the income drawn.
Real-world returns, of course, vary depending on prevailing interest rates, economic conditions, invested capital, product selections and risk exposure.
Still, this example showcases why astute decision-making can provide favourable income throughout retirement and bolster the earnings available from a conventional pension product.