RETIREMENT is more expensive due to cost of living crisis

Irrespective of this latest inflation spike, long term nothing changes: the biggest risk to all of our wealth has always been inflation. It is the silent wealth killer. If you are holding too much cash or not invested in assets that over the long term can beat inflation, your purchasing power to buy the stuff to support your desired lifestyle in retirement will be eroded.

I have had a number of retired clients get in contact with concerns about the cost of living. The rise in prices has come when investment portfolios are down circa 10%, causing further concern. As part of our portfolio construction, we hold circa 18 months' income in cash allowing us to not have to crystalise losses to fund income. It also means there is enough cash available to increase any withdrawals to cover price increases. In recent discussions, people who are yet to retire have proposed pushing back retirement dates to give them another 12 months of contributing to the plan, as well as one less year of having to draw from assets to fund their retirement. I have spoken with young clients regarding not only how to manage rising mortgage costs but also increasing insurance such as income protection to cover higher outgoings.

The rising cost of living is certainly having an impact on retirees. However, the recent increase in the state pension for 2023, of 10.1% goes some way to cushion the blow. A couple who each have 35 years of contributions will now be receiving £20,600 per year, which will help them meet their basic needs. Employees and certainly those working in the public sector have not seen similar pay increases. Weak equity and bond markets in 2022, which have underperformed inflation by a margin of more than 20%, have also dealt a blow to those wanting to access their personal pensions to supplement their retirement. Good financial planning is important here as having sufficient cash reserves can help avoid selling investments into a weak market and realising losses. There are encouraging signs, however, that inflation has peaked and is coming down.

The rise in the cost of living is the biggest warning to us all to look forward to what our retirement will look like. Look now. Act now. Who wants to live a minimum lifestyle? I know I certainly don't. For those already retired, they will be trimming their budgets now, if they have one. It is time for everyone to think how they can increase their income when the cost cutting tools are used up. Learning new skills, setting up a side hustle or even downsizing and investing the surplus for the future. We certainly all need to get our thinking caps on. I know I am.

It's a really sad state of affairs at the moment. We are having more and more retirees contact us to discuss equity release, as they are now having to release funds from their homes to help them with the cost of living. It's an emotional time for many people who have worked so hard to pay their mortgages off, and are now having to refinance just to put food on the table and keep warm.

Everyone will want a 'comfortable' retirement as a minimum. Inflation has always been and will always be the biggest risk to people enjoying a comfortable three-decade retirement. If you have not planned for your retirement well in advance then the chances are you are not going to have enough money to see you through. Create a financial plan and create it early. And whatever you do, don't make the mistake of moving all your money into cash and bonds as you approach retirement.

The PLSA's retirement living standards are a good benchmark of what it costs to live in retirement. The very fact a 'minimum' lifestyle now costs almost 20% more than it did a couple of years ago will be nothing short of terrifying for many retirees. This latest update to the cost of living in retirement tells us how important it is to have some headroom within your retirement plans, especially if you're funding it from investments. Finding £54,500 to feel comfortable each year as a couple isn't easy. When you think the average retirement could last 20 - 30 years, this can even be daunting. The best way to gain any confidence in this climate is to seek independent advice from a trusted retirement planner. Having a robust plan that stress tests this type of scenario could stop you from losing a lot of sleep.

In a way yes, but in a way no. Your retirement (and the cost of lifestyle when working) costs are down to you to a large degree. It's always possible to spend a bit less but in retirement you're probably more likely to want to treat yourself more, having worked for x number of years.
Life is indeed more expensive than a year ago. These levels of inflation are high but a longer view of inflation is needed; say 30 years of data to establish a general inflation level. I am currently using 3.5% in financial plans, which is 1% higher than a year ago.
Inflation will fall a lot in the next year. It will, according to experts, be higher than 2% for some time. Inflation is always here so incorporating it into your retirement planning is essential if you want to have the best retirement possible, and planning for disasters like 2022.

"It's not really surprising that the cost of living crisis is having an impact on those about to retire. Rising prices of almost 20% for the ‘minimum’ lifestyle are huge and extremely scary. If you’re planning for retirement, it’s really important to understand what you have and what this means. Working with a financial planner and building cashflow models based on your own personal lifestyle can help you understand if you’re still on track for the retirement you want."