Financial challenges that could impact your income and lifestyle during your golden years
Retirement signifies a fundamental shift from accumulating wealth to utilising it. After years of saving and investing, this new phase demands a different mindset, one focused on capital preservation, risk management, and sustainable income over many decades. Instead of pursuing maximum returns, the priority is on sequencing withdrawals effectively, maintaining an appropriate asset mix, and building buffers for market volatility.
Developing a resilient income plan that includes guaranteed and market-linked elements helps ensure your spending aligns with your lifestyle ambitions while safeguarding your nest egg. As people live longer and markets fluctuate, understanding the key risks to your retirement finances is essential for long-term stability and peace of mind.
Longevity risk
One of the biggest challenges in retirement is longevity—the risk of outliving your savings. Over the past 40 years, life expectancy in the UK has generally increased[1]. Thanks to advances in healthcare and lifestyle, more people are reaching their 80s, 90s, and even beyond. While this is something to celebrate, it also means your financial plan needs to last longer.
To manage this, retirees should adopt cautious assumptions in their planning and review them regularly. For example, lifetime annuities can provide guaranteed income for life, although they often have limited flexibility. Regular reviews can help adjust withdrawal strategies to account for increased longevity and changing needs.
Inflation risk
Inflation gradually reduces the purchasing power of your money, and even modest rates can have a significant effect over time. At 2.5% annual inflation, the value of money can decrease by about a third over 15 years. For retirees on fixed incomes, this can make it harder to maintain their living standards, especially for expenses that tend to rise faster than inflation, such as healthcare or long-term care.
Including inflation-linked investments, such as index-linked gilts, can help counteract this erosion. Keeping some exposure to equities is also advantageous, as shares have historically outpaced inflation over the long term. A flexible withdrawal approach can help retirees adjust their spending during periods of high inflation.
Market volatility
Market volatility is a common risk for investors, but its effects shift in retirement. When you begin withdrawing from your pension, poor returns early on can have a disproportionately large impact, a concept known as “sequence of returns risk”.
Maintaining a cash buffer or short-term bonds allows retirees to access income without needing to sell long-term investments during market downturns. Segmenting a portfolio by time horizon can further protect income, allocating funds for immediate, medium-term, and longer-term needs. This approach helps minimise the impact of short-term fluctuations while still providing potential for growth.
Decumulation risk
Turning a pension pot into sustainable income, known as decumulation, can be more complicated than the accumulation years. Market volatility, sequence-of-returns risk, inflation, and changing personal circumstances all affect how long the money lasts. Without a clear withdrawal plan, retirees risk overspending, underspending, or paying unnecessary tax. Once withdrawals start, it can be challenging to reverse poor choices, such as crystallising too much, triggering the money purchase annual allowance (MPAA), or locking into an unsuitable product.
A well-structured plan should coordinate guaranteed and flexible income sources, align withdrawals with spending priorities, and optimise tax allowances across accounts. Obtaining professional advice to regularly review income, expenditure, investment performance, and tax efficiency helps keep plans on track and adaptable to changing circumstances.
Behavioural risk
Financial risk isn’t just about numbers. Emotional reactions, such as selling investments during market downturns, can damage long-term results. Behavioural risk can cause selling low, buying high, or abandoning a solid plan altogether.
In retirement, priorities evolve. The focus shifts from maximising growth to balancing income, preservation, and flexibility. Managing these risks, such as longevity, inflation, volatility, decumulation, and behaviour, is crucial to ensure your savings last. With careful planning, regular reviews, and professional advice, retirees can navigate these challenges with confidence and clarity.
Source data:
[1] Office for National Statistics – National life tables – life expectancy in the UK: 2020 to 2022
This article does not constitute tax, legal or financial advice and should not be relied upon as such. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. For guidance, seek professional advice. A pension is a long-term investment not normally accessible until age 55 (57 from april 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.