Just as you schedule annual check-ups for your car and routine maintenance for your boiler, have you considered a financial evaluation for yourself? A mid-retirement assessment, often referred to as a “money MoT,” is crucial for ensuring your financial health.

As life expectancy continues to rise, planning for a retirement that lasts through your later years becomes increasingly important. The challenge for many is guaranteeing that their pension funds will adequately sustain them over time.

According to a study conducted by Aviva in collaboration with Age UK, only 48% of individuals aged 65 to 75 feel confident that their savings will last throughout their lifetime. This apprehension often arises from a tendency to underestimate longevity.

Many retirees believe their spending will remain constant; however, a survey involving 1,000 participants indicates that expenses typically follow a “U-shaped” trajectory. This means spending tends to be higher in the initial years of retirement, decreases during the middle part, and can spike again later in life due to potential healthcare costs.

Romi Savova from PensionBee emphasizes the importance of regular financial reviews, stating, “Just as regular pension check-ups are vital before retirement, evaluating your finances once you retire—especially at the midway point—is essential.”

She adds that a mid-retirement financial assessment can help ensure that your income aligns with your current lifestyle, spending patterns, and health requirements.

Proactive Financial Planning

Take John Ford, for example. At 73, he has effectively managed his retirement finances, possessing an inflation-linked defined benefit pension and a state pension that together provide him with around £36,000 annually. Additionally, he holds £340,000 in a defined contribution pension, which he has chosen not to tap into yet.

Ford explains, “I’m maintaining my savings for emergencies and future medical expenses. Last year, I spent approximately £7,000 on cataract surgery at a private clinic as I preferred not to wait for an appointment with the NHS. I also need funds for property repairs near Bristol.”

Having retired from his job as a surveyor at 65, Ford and his wife, Carole, who retired four years ago, are content with their income streams, which total about £51,800 after accounting for her state pension and a small defined benefit pension.

Ford reassures, “Fortunately, we can maintain a decent standard of living and our spending has remained fairly stable since retirement. Nevertheless, we are aware that we might require additional funds for future care, which is why I maintain my defined contribution pension.”

Carrying out an annual financial review can reveal whether it’s time to rebalance investments, adjust withdrawal amounts, and ensure that you’re aligned with your financial goals.

Lucie Spencer from Evelyn Partners notes, “Typically, retirees will incur most non-essential expenses in the early years of retirement. For many, this is a unique period when they have substantial funds and the freedom to spend. However, planning for later years is often overlooked. Questions about care home costs or who will cover expenses if savings run out tend to become more pressing around the mid-seventies.”

Managing Pension Withdrawals

Finding the right balance in pension withdrawals is critical; it should provide for your desired lifestyle without quickly depleting your savings.

Experts suggest withdrawing around 4% of your savings annually. This strategy allows the remaining investment to grow over time in anticipation of future withdrawals.

Fidelity International conducted an analysis on a £100,000 pension pot subjected to withdrawals of 4% per year, adjusted for inflation. Their research indicated that from 1994 to 2014, only in 1999, 2000, and 2001 did the pension pot’s value diminish after a decade of withdrawals, while in all other years, the pot’s value increased.

For instance, if withdrawals commenced in January 2014 at 4% annually, the £100,000 pot would have increased to roughly £154,000 by January 2024. Conversely, beginning withdrawals in January 2000 would have reduced the pot to approximately £81,319 by January 2010.

It’s crucial to recognize that market fluctuations can complicate withdrawal strategies. A sudden market dip can lower the value of your investments, as observed during recent economic disruptions.

Spencer warns against withdrawing funds amid market volatility, advocating for a strategy that allows your investments to recover. “If you are relying on your pension during a market downturn, selling investments at reduced values can significantly impact your financial sustainability,” she advises.

It’s advisable to maintain a cash reserve to cover approximately one year’s worth of expenses, providing a buffer during economic downturns.

Exploring Annuities

Instead of merely investing, retirees might consider using part or all of their funds to purchase an annuity, which guarantees a lifetime income in exchange for a one-time payment.

Tom Selby from AJ Bell highlights that as individuals enter their seventies, it may be beneficial to reassess whether maintaining investment drawdown is preferable to acquiring an annuity.

Annuity rates are influenced by life expectancy—the longer one is expected to live, the lower the rate, as the income is distributed over a more extended period. Consequently, purchasing an annuity later may yield a higher income.

For instance, a healthy 75-year-old could secure about £10,129 annually from a £100,000 investment, which is approximately 30% higher than what a 65-year-old would receive. Providing health details that may affect life expectancy can lead to better rates, and it’s wise to compare offerings.

However, choosing an annuity comes with its own set of challenges. The income type is fixed, which may pose difficulties if circumstances change, like needing increased funds for healthcare. Additionally, potential market growth is forfeited, and unless a joint policy is selected, payments cease upon death.

Establishing Power of Attorney

For many retirees, concerns about cognitive decline and the challenges that come with managing finances highlight the importance of establishing a power of attorney early on.

Spencer suggests, “I always advise my clients to set up a power of attorney to prepare for potential loss of mental capacity.”

A lasting power of attorney enables a designated person to manage your financial and healthcare decisions if you can no longer do so. This can take two forms: one for health and welfare decisions and another for property and finance management, and it’s generally advisable to establish both.

Applications for a power of attorney can be made simultaneously while you still possess the capacity to grant someone this authority. The necessary forms are available online, with associated fees that may be reduced based on income.