Does Retirement Mean the End of Income?

Rising life expectancy means you need to plan ahead to avoid your savings running out

Robert van den Oever 12 August, 2021 | 12:02PM
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Pensioner on the beach

Arriving in retirement means enjoying well-deserved free time - no more obligations, no workday agenda dictating your week. But also, no more salary. Instead you have a pension, either from your employer or the state, or both. While they may provide a steady income stream, the switch to no longer working usually also means a change in the level of income.

Income Gap

A pension is in most cases lower than the monthly income you will have enjoyed while working and pensioners should be aware of that gap.

For many people, this gap will be manageable but for some the new level of income may not be enough for the longer term. From that perspective, retirement is the end of working life, but not the end of finding (extra) sources of income. In the UK, the current state pension is just shy of £180 a week, which for many people will not be nearly enough to live on. 

If extra income is needed, then you have to decide for which purpose you want it: short-term as a way of more spending power; or long-term for extra income in the future when years of lower income from pension have eroded your savings pot.

It may sound strange to look forward financially when already in retirement, but rising life expectancy means many people will now leave for 20 or even 30 years in retirement, making it all the more important to plan to make sure your savings don't run out.  

Short-Term Income

It's become increasingly common, particularly as the state pension age has increased, for workers to stage their way into retirement, gradually reducing their hours through part-time work or job-sharing. This can make the shift to a lower income more gradual and more manageable, but many retirees will still want to boost their earnings once after they have stopped working completely. 

If you want to invest as a source of short-term extra income, then higher risk assets can be useful because there the chances of relatively high and quick returns are best. Of course, that also means the chances of making a loss are higher too. Financial advisers typically suggest that you shouldn't put your money into higher-risk assets unless you are investing for a minimum of five or even 10 years. 

So another category that delivers in the short-term is dividends. Choosing stocks or funds focusing on high dividend yield will bring you a regular income when the dividends are paid. Dividends are by no means guaranteed, as we saw in 2020 when a raft of companies slashed their payouts to shareholders to shore up their finances during the pandemic. But there are measures such as dividend cover and long-term dividend growth that investors can check to help them target those companies whose dividends look safest. 

When paid, a dividend is a very valuable form of return. Fund investors can choose to roll their pay out back up into their investment, which can help further boost their returns. 

Long-Term Income

Investing for extra income over the longer-term when retired is not really different that investing for your pension while still in your working years. But you'll have to consider what your time horizon is - this can be difficult to assess, and most people underestimate their life expectancy, leaving them at risk of outlasting their savings.

Being in retirement, you can calculate the effects of the lower income level you have, compared with your working life income. Over the years in retirement, that could mean that you need all your income and reserves for your everyday spending, up to the point where the end of your reserves is reached. In such a scenario, you may need extra income, delivered by your investments, to compensate for the shrinking reserves.

You have to decide about your financial future; when do you want the investment returns to deliver. And what risk profiles fit the different timeframes during your life in retirement. For these longer term decisions, calling in a professional adviser can be a sensible step, either for full advice or a second opinion on your own thoughts.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Robert van den Oever  is Research Editor of Morningstar Benelux