Flexible retirement planning: How to beat the collapse of best laid plans

Laura Miller

by , Freelance financial journalist

12 Oct 2020 /  

12
Oct 2020

Sandtimer with sand filtering down on a blue background

We all know what they say about best laid plans going awry, but for maybe the first time we’re seeing the life designs of millions of people being disrupted at the same time due to COVID-19. Retirement goals are no exception.

Scant consolation right now, but the young at least have time on their side. Older workers, who thought those last few years before retirement would give a big boost to their pension pots, are fast approaching trouble - forced to retire later and poorer because of coronavirus.

1/8 older workers have already pushed back their planned retirement age as a result of the pandemic, the Institute of Fiscal Studies (IFS) found 1/3 reported a worsened financial situation.

Older adults are more exposed to financial hits to their pension saving because, being closer to retirement, there is less time for fund values to recover before they might want to start drawing on their wealth.

Most of us have defined contribution pensions that are invested in the stock markets, which fell heavily at the start of the year as the enormity of the pandemic became clear. The UK’s FTSE 100 index, in which many British savers’ pensions are heavily invested, is worth approximately 20% less today than on 2nd January.

Postponing retirement was more common among older workers with a pension fund that has fallen in value, the IFS found, pointing to their need to work longer to make up the shortfall.

When you have an end goal for your retirement planned years in advance, it can be a huge wrench to know that will no longer be possible and you’ll have to keep on working.

What does this tell us?

It’s an important warning for savers not to leave their biggest pension contributions to the last minute. We tend to put more into our pots the older we get, mainly because we’re earning more later in life so can afford to.

But by then we’re also closer to retirement, meaning there’s less time to benefit from the power of compounding that does so much to make our savings grow, or make up a shortfall if, like we have seen recently, markets fall heavily.

Other issues may also get in the way of large late contributions, like unemployment; 4.8 million workers over 50 are concerned about job security due to COVID-19 pressures. 1/3 are worried about finding new employment in the event of losing their job.

Pension plans should not be built around a level of job security that for most people is far from guaranteed. A good financial plan should focus on starting retirement planning as early as possible, not relying on the later stages of working life to fund a pension.

Experts often recommend a multi-asset investment approach to building a pension pot, to help to smooth out short-term shocks in the economy. Annual reviews are important to make sure your plan is on track, and to make adjustments, like reducing the riskiness of your investments as retirement gets closer.

Separate rainy day savings are also lifesavers right now. Older workers with emergency funds can dip into that when times get tough, rather than taking their pension earlier than they may otherwise have done.

Take your pension early (from age 55) and it may have to last you as long as three decades or more. Most of us don’t have big enough pots for that, not if we want a comfortable retirement, and wealth will be permanently reduced if you draw on it before asset prices recover.

Working longer may not be all bad, however. The IFS found postponing retirement was also prevalent among those working from home, suggesting changes to employment structures as a result of the pandemic are making it more attractive for some people to carry on in their jobs.

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