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- [00:00]
A
Today's episode is sponsored by Trading 212 the platform bringing commission free investing to everyone. On paper, now looks like a fine time to retire. Annuity rates are generous, gilts finally pay a real return and even cash earns its keep. But retiring to a richly valued market and a bad first few years can ravage a pot you can't easily rebuild.
- [00:27]
B
We weigh the best guaranteed income since the financial crisis against the of stopping work at the worst possible moment. And in today's dumb question of the week, can you un retire? All right, let's get into it. So we don't choose when we're born, we don't choose when we die, and for the most part we don't choose when we retire. So we're going to ask, is now a good time to retire? But for most people, they're probably thinking, well, it's not really up to me, is it?
- [00:56]
A
That's true. It's not really under our control for many people. I mean, if you work for a company, you're often politely told, actually this is the time that you probably should be retiring.
- [01:07]
B
Sometimes it's polite.
- [01:12]
A
And in a certain sense, historically you'd have been really unlucky if you'd have retired before retirement was a thing. You'd have just died in the job. But I think the timing here is important and I think we are in a pretty good position right now for people who are retiring. What do I mean by that? Well, usually the retirement phase is quite different from the accumulation phase in terms of what you want out of market. And what you really don't want is a period when there's been a catastrophe in markets just before you retire. Because if that's happened, then you can have these very prolonged periods when all of those savings that you'd been very carefully squirreling away are now massively depleted in value.
- [01:57]
B
You're right that the mindset flips. So in the accumulation phase, we always try to frame a market sell off as a sale. But now's a good time to buy stocks. Isn't that great if you're building your pot? But once retirement is on the cards, you're not really able to buy in that sale. In fact, you're doing the opposite. You're the one selling and you're a
- [02:17]
A
false seller because you have to sell stuff to eat. And if you were really unlucky, you'd have retired in 1929 perhaps, or maybe in 2000, just as we had this double crisis, the dot com bubble and then the global financial crisis. So those were probably, if we had to think about the last century, the two worst years that you could have retired.
- [02:41]
B
I think actually in the U.S. anyway, 1966, I seem to remember, was the worst year to retire historically. And I sort of remember that for two reasons. One, it just in my mind, the World Cup's going on right now, So I remember 1966 as a date. But also when I've looked at the 4% rule in the past, and that's all based on US retirees, it's trying to come up with the safe withdrawal rate, which means finding the worst year. And the cohort that's always like the canary in the coal mine for the worst year is 1966, because it was just on the eve of a really long drawn out bear market and a period of high inflation.
- [03:20]
A
Yeah. Weirdly, in 1929, in the years that followed, we had a period of deflation, which actually would have helped you. And I know in the 1970s in the UK we had that awful period of inflation combined with really awful stock market returns, which would have been pretty grim.
- [03:37]
B
And when you say awful, you mean 25% inflation?
- [03:40]
A
Yeah, it's hard to even imagine even after we've seen the post Covid inflation.
- [03:46]
B
So is now a good time to retire? Well, probably better than then, we hope. But what determines it? What makes some years a better vintage than others?
- [03:55]
A
I think one thing is political stability and economic stability. Those were periods of huge change, moving off the gold standard, a huge post world war realignment, or maybe it's a period of war. Both of those are really awful for returns. And hopefully we're not in that period right now. Of course, we're seeing a huge conflict between Ukraine and Russia. We're seeing a conflict in the Middle east, but at least in Western Europe at the moment, we're not in a period of warfare.
- [04:29]
B
I wouldn't say we're in a period of political stability either.
- [04:33]
A
Yeah. As we record this, I've just watched Starmer resigning on TV.
- [04:37]
B
But then again, the year 2000 was relatively stable. There weren't wars. Politics, at least compared to now, was sane. And yet that was one of the worst years to retire, you said.
- [04:48]
A
But I think macroeconomically this is a fairly stable period. We have had the post Covid shock and we have recovered from that. And I think things have stabilized after that. And if you look at things like volatility of markets, you look at credit spreads, you could describe it as complacency, but those are telling me that this is not a market which is distressed.
- [05:10]
B
I guess the thing retirees have going for them now, which wasn't true five or six years ago, is that the safe part of your portfolio is actually going to pay you. So annuity rates are the best they've been since the financial crisis, really. Real yields are positive when you look at the gilt curve and bank rate from the bank of England and the rate you get on your savings is above the inflation rate. So if you're looking to secure a kind of income floor, make sure your expenses are paid every year in a safe way. You can do that at a reasonable cost now.
- [05:44]
A
Yeah, I'm having so many conversations about building a gilt ladder, either inflation linked or just a regular gilt ladder with clients. And I think that's great at the moment if you live in the uk, because if I speak to European clients, a completely different picture, they've got ultra low rates compared to the UK. Not as low as we were in 2022, of course, but still nowhere near as good as the uk. So everyone's complaining about the gilt market in the uk, saying that, oh, it's overstretched is unsustainable, but in fact the yields that we're earning are very good indeed, both in nominal and real terms.
- [06:23]
B
Well, they're kind of two sides of the same coin, aren't they? From the Government's point of view, they wouldn't want to be paying these high rates, but from a saver's point of view, yeah, you're cashing in.
- [06:32]
A
So as long as they don't default, I think for the UK saver, it's actually looking pretty good, and for the retiree it's looking great.
- [06:40]
B
As long as they don't default and as long as they don't allow inflation to run ridiculously hot over your retirement period.
- [06:47]
A
And there, of course, is the bank of England remit, and I think there's still fair confidence in the ability of the bank of England to do that. There aren't any signs, I don't think, that markets have become unanchored, that they don't believe the bank of England will do its job.
- [07:02]
B
I suppose the question, if you're on the verge of retiring right now and you've built up this big pot, hopefully, let's imagine it's all in a defined contribution scheme, is what should I do with that pot as I enter retirement? Should I buy an annuity for some or all of my spending needs? How much of a cash buffer do I need? And for everything else that's remaining invested what's the right asset mix?
- [07:28]
A
So when I'm thinking about this, I generally split it into buckets. So how much of my money will I not touch for a very long period of time? How much of it will I need sharpish? And then there's a kind of intermediate period as well, the stuff you're not going to need for ages. A large proportion I'd put into equity, the intermediate bit, 50, 50 safe and equity, and then the shorter term bit. Maybe you'd have something very safe indeed. But another way of approaching it is to say, well, I'll cover my basic requirements with something ultra safe and then I can layer the risk on top of that with the confidence that I'll always be able to pay the bills, whatever happens to markets.
- [08:09]
B
And are you thinking about annuities there? So taking some of your pot and handing it over to an insurance company who will pay you an income every year until you die.
- [08:20]
A
Yeah, that's what some people do. Some people build their own annuity. But now we can build annuities with pretty good incomes without such a large capital outlay, given that yields are higher. So let's take a quick look at where annuity rates stand right now. And I'm looking at a table that says for 100k initial investment. So you take £100,000 of your money, huge sum, and hand it over to an insurance company and they pay you a certain amount every year. Now there are loads of whistles and bells that you can then apply to that annuity, which increases or decreases the amount that you get every year and also affects how it's uplifted with inflation. Another really important thing is whether it's single life or joint life between you and your partner.
- [09:06]
B
And another important thing appears to be whether you're a smoker. So it says here with a little asterisk, a smoking annuity is based on a 65 year old who has smoked cigarettes a day for the last 20 years and drinks 15 units of alcohol a week. I don't know how you prove that. There must be some kind of rules the insurance company has, but it's a little late now, isn't it? You should have taken smoking up a long time ago because you get better rates for it.
- [09:31]
A
Well, maybe you should document it now, you know, if every time you're in the pub you should take a video of yourself drinking a pint and smoking a cigarette.
- [09:39]
B
People do that on social media, don't they? Maybe that's the proof. I think what they actually do is type to your Medical records. But anyway, let's go back to this table you were telling us about. What are you going to get for your £100,000?
- [09:50]
A
Well, let's start off with no whistles and bells. Of course, it depends on your age. The older you are, the more money you get, the riskier you are, the greater the risk of death, the more money you get. That's the general principle. So let's say you're age 55, single life, no increase of the amount you're paid over time.
- [10:10]
B
So it's not tracking inflation.
- [10:12]
A
Yeah, it'll be gradually diminishing in terms of its buying power over time between now and when you die, with no guarantee now, that's going to earn you about $6,700 a year. So a rate of about 6.7%, which isn't bad.
- [10:26]
B
So that's if you're 55. If you're buying the annuity at age 60, you get a bit more around 7,000. And if you're 65, you get almost 8,000. But the caveat that it's not linked to inflation is a pretty big one.
- [10:41]
A
Because if you do live a long time, and life expectancy, if you retire age 55, will probably be about 30 years, a little bit more than 30. In 30 years time, it's very likely that the buying power of that 6700 will be pathetically small.
- [11:00]
B
So as informed consumers, we're aware of that. How much are we getting if we actually want to link it to inflation?
- [11:06]
A
Well, there it suddenly looks pretty grim. Now you're only getting a rate of about 4.1%, and that's assuming that you're age 55.
- [11:15]
B
You say it's pretty grim, but it's not wildly out of line with real yields, is it?
- [11:20]
A
And it wouldn't be because guess how the insurance company generates these cash flows. Yes, they go to the linker market or do they go to the nominal bond market? And that's how they generate their cash flows.
- [11:32]
B
And they're making loads of assumptions about their entire portfolio of retirees and the average age of death and the structure of those cash flows over time.
- [11:41]
A
Yeah, you've got to give those actuaries something to do. So those actuarial tables are going to be dusted off and used heavily.
- [11:49]
B
So you might think 4.1% is nothing to write home about, but it's a lot better than it was in the zero interest rate era.
- [11:58]
A
Yeah, when annuities were never even discussed. Nobody even considered it. Well, now you bet people are considering it.
- [12:06]
B
Is it something you'd consider now?
- [12:09]
A
Personally, I wouldn't. I'd rather roll my own. So I'd build a ladder with linkers or with nominal bonds or maybe a combination of the two.
- [12:18]
B
Is there a disadvantage to doing that?
- [12:20]
A
I think for the vast majority of people it's just too complicated and it's too much effort. Plus there is the possibility that yields could fall quite dramatically again, as they did in the past. If we have a crisis or something and the bank cuts rates and if you hadn't locked in the yields as they stand now for a long period of time, then you'd have to take a lower income. For me, it would just be part of the portfolio anyway. So in that kind of environment, if you cut rates massively, presumably that would stimulate growth and the equity component would do better. But I'd rather not pay the insurance company the fee and take the responsibility of doing this myself. But I know that for many people that's just not on the cards. That's not something they'd be willing to do.
- [13:07]
B
If you expected to live a very long time, far past the average of someone retiring and buying an annuity at 55, say, then it might make sense to buy an annuity, right?
- [13:19]
A
Yeah. Or have more equity because that's probably going to pay off more than the annuity would.
- [13:25]
B
And on the flip side, if you expect to die tomorrow, obviously buying an annuity makes no sense at all.
- [13:31]
A
Yeah, that would be bonkers. So clearly you wouldn't do that. But the idea of a guarantee period is a very important one. Now. That's the minimum length of time the annuity will keep paying out even if you die early. So let's say you've got a single life level five year guarantee. That means that if you die within the first five years of buying the annuity, then the payments will continue to your beneficiaries or estate until the five year window's up. If it hasn't got a guarantee, then the payments stop the moment you die.
- [14:02]
B
Let me guess, if you want a guarantee, you're going to get lower payments.
- [14:07]
A
Bingo.
- [14:08]
B
There's no free lunch here, is there? Those damn insurance companies.
- [14:13]
A
So, yeah, you're handing over this lump of cash. You get a guaranteed income for a certain period of time until you die. It can be a joint life policy where if one person predeceases the other, the other person carries on getting some percentage of the original amount. And everything that you do in your favor which increases the amount of average payouts you'll get, will reduce the amount of the annuity. And then of course there's the idea of inheritance. You can have annuities where you can pass on the benefits, the lump sum to your beneficiaries. But again, that reduces the level of the annuity, so you pay for everything. Whereas if I did my own, well, in that case my beneficiaries would just get whatever's left in the capital in the capital investment.
- [15:01]
B
Now they have to pay inheritance tax on it. Maybe that speaks in favor of spending it yourself.
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A
Well, you know, I don't really begrudge the government the X percentage that they'd have to pay in inheritance tax. Better to have something where you've paid tax on it than nothing where you don't pay tax on it.
- [15:19]
B
You just cost us about 10% of our subscribers there. Roman speaking positively about inheritance tax,
- [15:29]
A
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- [16:59]
B
So we've spoken a lot about what to do with the safe part of your portfolio, and I think it's uncontroversial to say that as you approach retirement you probably do want a safe element to your portfolio. The standard approach is to maybe de risk in the five years before you think you're going to retire, but not to de risk too much and leave a good chunk of your pot invested in the equity market. But that bit that remains at risk and subject to the whims of Mr. Market depends very much on the sequence of returns you experience in your retirement. As you said earlier, a big market sell off just as you retire can have huge consequences for how long your pot is going to last. Even if the average return over your retirement period is reasonable, a few bad years at the start can be devastating.
- [17:50]
A
Yeah, and often we have difficulty thinking through these sequence of returns risk examples. It does seem very odd that if you take a certain set of returns for the rest of your life, shuffle them so that the bad ones happen at the beginning rather than the end, well, that's much worse for you than if they occur at the end than the beginning.
- [18:10]
B
That is very odd, but devastatingly true.
- [18:14]
A
Yes, unfortunately.
- [18:16]
B
So what are the approaches to mitigate that? Because I think people look at the markets now and are nervous. Valuations are stretched, especially in the US if you look at things like the CAPE multiple, which compares today's stock prices to the earnings they've generated over the last 10 years, we are clearly at a peak. The only time it's been higher was at the very top of the dot com bubble. And even then it was basically the same as it is now, where Cape is in excess of 40. So it doesn't mean that there's going to be a huge sell off, but you couldn't exactly say you'd be surprised if there was one. So how should people mitigate that?
- [18:55]
A
Well, a conversation I'm frequently having with people is about a reverse glide path, where in a normal glide path you probably know this 100 minus your age rule where the amount you have in equity is gradually tapered over time. So when you're 30, it would be 70%. When you're 90, it would be 10% in equity. So a gradual de risking over your lifetime. And if you look at funds like the target retirement funds from Vanguard, you'll see that profile. It's not 100 minus your age, but it's falling instead of that. With a reverse glide path, you start off with low equity as you start retirement and gradually ramp it up, which weirdly, if you do backtests, does pretty well because what you're doing is you're selling the safe stuff first and not touching the equity and just letting it compound. And historically that's actually worked exceptionally well because equity does best when you leave it for a long period of time.
- [19:56]
B
So that effectively means de risking quite aggressively early on in retirement and then re risking the older you get.
- [20:04]
A
Yeah, exactly. Now obviously that's often a drag on return. You'll be looking at everybody else making lots of money with all these crazy things like SpaceX and anthropic and all these exciting things, while you sit quietly in guilt. So that's the price you might pay, some kind of fomo as you watch risky assets do incredibly well. Another potential problem might be that you'll underperform as a result of that heavy de risking. Because usually what happens is that if you're in bonds or money market funds, say, you will underperform equity by an average of about 4 or 5% a year.
- [20:44]
B
Is this all just another way of saying you should have some kind of cash buffer, two or three years, say, as you enter retirement?
- [20:51]
A
I mean, it can be cash or it could be gilts, or it could be a global bond fund. But having that diversification is never a bad thing. But is it the same thing? I guess it's an allocation. What you call it is up to you.
- [21:06]
B
If you have this safe buffer, whether it's cash or money markets or short term gilts, whatever it is, the thing that's going to not panic when the rest of the market sells off is the idea that you don't touch that. If markets don't fall, is it just there for an emergency?
- [21:23]
A
Well, let's say you've got a reverse glide path. What you're effectively doing is eating the safe stuff. So you'd be selling some of your gilts every year and not touching the equity. Now, you can imagine a scenario where you get a gilt crash as say, for example, a very spendy government comes into power in the UK and gilt markets tumble. Now, you could argue that at that point, maybe what you should be doing is not drawing on the gilts and moving into selling some of the equity. And if the equity hasn't crashed, I think there's a case to be made for that, maybe even selling some of the equity to buy some gilts at the depressed prices and high yields. So I'd say with all of this, don't set it in stone, be pragmatic and if there is an opportunity, then often a reallocation might make sense, if you're comfortable with that kind of thing. If not, then, yeah, I'd just stick to the plan and just keep it simple.
- [22:19]
B
So to come back to the question at hand, is now a good time to retire? It seems like the trade off is quite clear. You've probably built up a fair old pot by now because market returns have been so good over the last 15 years. But the consequence of that is markets look expensive, they've run up so much and that's a risk. But the risk free rate has risen alongside that. And so you're getting a real return which is good for annuities, good for gilts, good for cash even. But inflation still remains above target, sticky and with upside risks. If you believe the bank of England. How do you think about that in the round then? Is now a good time to retire? Should someone retiring now do anything differently to someone retiring five years ago, as you say?
- [23:09]
A
I think many people have profited hugely from the run up if they didn't have an under allocation to equity. I think a danger at the moment is that if you miss the boat, if you were someone that was cautious and you're really feeling the FOMO that you'll be tempted to re risk, to dial up your risk and it may be possibly a bad time to do that. I don't make market predictions, but I wouldn't be piling into risky assets right now if you were cautious before, especially
- [23:38]
B
if you're on the eve of retirement.
- [23:41]
A
Yeah, and I do speak to people who talk about that. They say, look, I really am kicking myself. I just missed out on all of these incredible returns. We had these awful stories, we had the trade war, we had actual wars in Europe and I just thought this is too risky, it's bound to sell off. So I've been super cautious, I've been in cash or I've been in guilt and I've massively underperformed. And I'm really tempted now to buy some equity and pile into these risky assets which have done so well.
- [24:12]
B
It's a very human thing to think, but maybe that person should realize the evidence suggests they are the worst market timer in the world. Let's not try and time the market again.
- [24:25]
A
Naturally I wouldn't say that did I
- [24:28]
B
just cost us another 10% of our subscribers.
- [24:35]
A
But I think what this shows is it's not easy. You know, all of these decisions are super important in the sense that they pretty much determine your retirement, whether it's a good one or a bad one. And there are no obvious answers. I think really all you can do is look at history and see what worked in the past. That's the best thing we can do. And also know yourself, know what your risk appetite is and find something that you're comfortable with and stick with it and have a plan because that's when things go really badly, is when you just lurch from one thing to the next and there's no structure to it. You go from a low risk portfolio to a high risk portfolio in the hope that this is going to shoot out the lights and save your retirement.
- [25:21]
B
Yeah, it's a marathon, not a sprint. That's clear. We focused a lot on markets, but that's not all that determines whether now is a good time to retire. Politics, for one, changes over time. And what retirees might be dealing with right now is that the income tax threshold has been frozen for a long time and is going to continue to be frozen into the foreseeable future. And so more and more people are being dragged into paying higher rate tax on their pension income.
- [25:51]
A
Yeah, that seems like an inevitable erosion of the tax benefits that we get over time. The UK is poor, we're not a rich country and we've got to have some kind of fiscal tightening in some form, whichever government's got the courage to do it.
- [26:08]
B
I don't know if it's poor, but it's getting poorer.
- [26:11]
A
Yeah, all these things are relative, but we're certainly not in the US league, for example, in terms of wealth.
- [26:17]
B
And because of that, I think there's political risk around a lot of what retirees have come to rely on. So the triple lock is not going to last forever. We know that it's just a mathematical certainty that it can't because it grows faster than tax receipts and faster than gdp. So you literally, if you left it there, eventually the whole economy is pension payments. Obviously it has to change at some point when a government gets the political capacity to do so or the IMF forces us to do it. And I guess the other thing is that there is that big tax benefit around the 25% tax free lump sum. How long that's going to last is also uncertain. We know it's been capped now and again.
- [27:02]
A
I've spoken to many people who've taken the lump sum because they don't believe it's going to be around forever. I'd be cautious about that because if you do make these irreversible changes on the basis of something which may or may not happen, that may negatively impact you later on. And again, it's not an easy choice to make. But I think you're right about the triple lock. I think that's unsustainable. So now, in a sense is a great time to retire because we'll look back on this time and think, oh, look, there was a pension triple lock. That was incredible. Rates were high, markets seem to be doing really well. So just remember the feeling you've got right now, I think, because it may not be quite so peachy later on.
- [27:45]
B
I suppose there's a whole element of this which we haven't touched, which is around your personal situation. A lot of that is going to determine whether it's a good time to retire or not. So you mentioned the state pension. Whether it's a good time for you to hang up your boots to some extent, will depend on have you got enough qualifying years to receive your full state pension? If you decide to quit the office before that, then you're foregoing some guaranteed income for the rest of your retirement.
- [28:18]
A
Yeah. And again, this is a conversation I have quite a bit. Do people think they've got enough based on how much work they've done? And usually it comes down to whether they enjoy their job or not. If you do enjoy it, then you don't want to stop. But if you don't enjoy it, and I've got to say, a lot of NHS staff that I speak to are the ones that don't enjoy it, then they've got that calendar on the wall and they know precisely how much they can take and when they can afford to leave.
- [28:43]
B
Have you had a lot of doctors crying on the phone with you lately, Romin?
- [28:46]
A
What's going on? Not lately. I mean, this has been a steady stream of coaching sessions with people who work in the nhs, with a very few exceptions. They tell me that their job is very stressful, that they're overworked and they find it very difficult going to work every day.
- [29:04]
B
That's really sad to hear. Yeah.
- [29:07]
A
Fundamentally, they're lovely people. They went into medicine often because they wanted to help people, and yet they feel as if they're just overworked and they find work very stressful.
- [29:18]
B
We're in danger of straying into political territory here. Let's row it back. Let's row it back quickly. What you own in your portfolio is going to make a big difference as to whether it's a good time to retire. I think if you've built your retirement on the basis that you own a lot of buy to let properties, it's a less good time to retire than it's been in the past, at least. People who own a lot of buy to let say to us, the market's changed, it's not what it was. And in a lot of cases, their property portfolio is barely paying its own bills.
- [29:51]
A
Yeah. The yields can be low now and of course, you've got all of the extra legal requirements in order to be a landlord. So the needle has definitely swung away from buy to let as being a popular way to invest. Also, it's very tax inefficient in the uk, so I see very few people now with large property portfolios. Often I speak to people who've sold that portfolio and now have reinvested it into the equity market. In fact, again, that's a source of many coaching hours, which is, I've got this portfolio which I've sold in property. What am I going to do with the cash if I invest it into market?
- [30:29]
B
I'd also question whether owning a load of buy to lets even counts as retirement. It can be a lot of work, unless you just hand it all off to a managing agent and then you probably aren't making much money anyway.
- [30:41]
A
Yeah, it's a job and sometimes it's a holiday let, which is an annex to the house. That's also a lot of work and that's the kind of headache you probably don't want in retirement.
- [30:52]
B
A lot of people have it though. And just to wrap up now, there are so many considerations here that are very specific to you when it comes to thinking about, is now a good time to retire? And I'm thinking here about things like health and longevity and what you want from the rest of your life.
- [31:12]
A
And these are things only you can judge. You can speak to an advisor about this, but it's ultimately you that has to decide, are you happy with your job? Are you happy to semi retire? Do you want to maybe keep your hand in and get that stimulation which people get from work? Because many people retire and they lose that sense of self worth. Because if you're just sitting at home with your cockapoo,
- [31:38]
B
not mentioning any names here, obviously, Teddy.
- [31:41]
A
No, you just don't feel the same as you did when you were flying around and being someone important at work. If that's what you do.
- [31:49]
B
And it depends to some extent on is there something you'd rather be doing, Are you retiring to do something else or have you just had enough?
- [31:57]
A
Yeah, and sometimes people say, I want to spend more time with my family or I want to spend less time with my family and there's a project that they enjoy or perhaps they want to work for a charity or perhaps go back into education, something that they've always wanted to do but never had time.
- [32:14]
B
And if you can afford to retire or you think you can afford to retire and you have something that you really want to do, you've been thinking about it for a long time, maybe it's time to just do it right.
- [32:23]
A
Life is short, and you've saved that money for a reason, which is to enjoy it. And healthy life expectancy is much shorter than life expectancy itself. I've only got four years left, Michael,
- [32:36]
B
of healthy life expectancy, apparently. So you better not move any more chairs. Do you remember when you had to take a week off because you tried to move a chair out of your office?
- [32:47]
A
It was very heavy. It was one of those kind of reclining things. And someone had bought it off me and they wanted help carrying it to the car, and I felt churlish if I said no. So I helped them and that put my back out. It was terrible. But coming onto that health thing, I think that's another really important thing about why now is a good time to retire, which is that we're healthier than we've ever been before. If you compare our generation to the previous one, we've just got much better information about what a healthy lifestyle is, what you eat, the exercise that you do. And I think more people are taking it seriously as well. We saw the previous generation where people would often die of a heart attack, and we know that we can take action to avoid that, and many people are. So the chance of having a healthy lifestyle and a healthy retirement and quite a long lifespan is now greater, I'd say. And to some extent, that is under our control.
- [33:44]
B
I suppose the ultimate question is not, is now a good time to retire? It's is now a good time to retire for you, and is it better than retiring tomorrow?
- [33:52]
A
And is it something you want to do? Maybe it's not something you want to do and you want to put it off as long as possible. And again, that's something some people tell me they want. You know, they don't want to stop, they just want to carry on until
- [34:05]
B
you're taken into the side office and someone has a quiet word.
- [34:13]
A
Now, it's all very well hearing all this theory, but if you speak to people who've actually retired and who are willing to share their experience, that's an incredibly valuable resource, and you can do that as part of our community. Just go to pensioncraft.com membership to learn more.
- [34:33]
B
Okay, today's dumb question of the week. Can you unretire? So we've spoken about whether now is potentially a good time to retire. What about if you think, yes, it is, you retire, and then you think, uh, oh, I've made a big mistake. Can you go back on this decision?
- [34:51]
A
I often have that conversation as well, where people say, yeah, I've Retired, but frankly I'm bored and I just want something to do and I've gone back as a part time consultant or maybe they're working in a field where they can go back just in another role with less stress at a lower level.
- [35:11]
B
I mean, I did look into the stats around this and it seems that unretirement is actually remarkably normal in the uk. I read that one in four retirees actually do go back to work and mostly within five years of retiring. So it's not that they eventually get bored, it's that they realise they want something to do quite quickly.
- [35:33]
A
Now, the way you phrased it sounded like, oh, I retired and then I realised I was super bored. And then I thought, no, I better do something. Whereas in fact, mostly this is planned. So you take a break from work, you retire, you start earning the income and then you go back to it as part of your retirement plan, to doing some kind of work. Maybe not the same, but some kind of work.
- [35:58]
B
Yeah. That's interesting to know. Maybe people are better at anticipating what retired life looks like than we give them credit for. But there are some things about retirement and how the financial rules work that means you can't reverse every decision. If you did think you've done the wrong thing.
- [36:17]
A
Yeah. So let's say you've got an equity heavy portfolio, you retire with no initial plans to go back to work, and then there's a huge market crash because of a huge economic recession. Well, guess what? There won't be jobs to go back to. That's the definition of a recession, effectively. So it may be that you're stuck out of work with a depressed portfolio where you're going to be living a lower quality of life because of the choices you've made and it is not reversible.
- [36:48]
B
So what you're saying is unretirement is a poor hedge for market risk.
- [36:53]
A
Yes. Don't think of it as a bailout option.
- [36:56]
B
But what I was really thinking about were things like annuities. Like if you buy an annuity, you can't reverse that decision and say, please give me my pot back. You've swapped the capital for income and you can't unwind that.
- [37:11]
A
That's one of the reasons why I don't like annuities. I never like choices which are irreversible and annuity purchases often are. Unless it's a term annuity where you just say, okay, give me a fixed income for X years and then at the end of that period I can choose whether to renew it or Get a new one or not renew it at all.
- [37:30]
B
Another irreversible decision which we kind of touched on is around the tax free lump sum. Once you've taken that, you've taken it.
- [37:38]
A
And again, I don't like it because of that reason. But if your belief is that it's going to go away, I can see why people do that.
- [37:45]
B
Also, some people take it as a big lump sum at the start of retirement because they've planned to use that capital for something, maybe paying down the mortgage or gifting something to their kids to buy a house. People use that money.
- [37:57]
A
Or it could be that they want to move money into ISAs, or it could be that they want to have a more equal pension with their partner. So by releasing the tax free lump sum they can pay into their partner's ISA and SIP in order to make the buckets roughly equal. And that's because it's more tax efficient to have two roughly equal sized pensions rather than one huge one.
- [38:20]
B
But that tax free lump sum, if you take it all, then it is gone. There is another aspect of pensions legislation which is not really reversible and that's around the money purchase annual allowance.
- [38:33]
A
Now, once you start, flexible drawdown. And one good way to figure this out is are you paying tax on the money you're withdrawing from your pension? That is irreversible in the sense that it reduces the amount that you can put into the pension in future. It goes down from 60k maximum per year per person down to 10k.
- [38:54]
B
Yeah. So if you suddenly did decide to go back into work and were a high earner and wanted to squirrel loads of it away into a pension, this would prevent you doing that.
- [39:03]
A
You can still gift it and you can still put it into an isa, both for yourself and your partner. But yeah, it reduces how much you can put into the sip, for example.
- [39:13]
B
Those are the kind of technical and policy matters, which means that retirement is not really fully reversible once you trigger some of these events. But there is a more squishy psychological thing here and a kind of bias thing that if you decide to go back into the workforce after taking two or three years out, it's probably harder. You probably won't earn as much as you did before. And I think it gets harder and harder to get hired as you get older. The stats seem to bear that out. There's lots of research from the center for Aging Better, which finds that people who are made redundant over 50 are three times less likely to find work within three months than younger workers.
- [39:55]
A
Are. Yeah, so say you're a software developer. Your skills will atrophy over time unless you actively keep them in shape. If you're a lawyer, perhaps you get out of touch with changes in the law. Any profession which is knowledge based, you could say that that's going to be a problem.
- [40:13]
B
And it might not even be that your skills atrophy. It's just that hiring managers think they atrophy. Do you know what I mean?
- [40:20]
A
There is ageism. There's no question. People are more willing to hire someone young who's going to be enthusiastic and not paid much than someone who's older, where they've got stronger opinions and may disagree with you, where there may be a threat.
- [40:34]
B
And there's this weird thing where often the managers don't want to be hiring people who are older than them and managing people older than them if there's a significant age gap anyway.
- [40:45]
A
Yeah, psychologically that's quite difficult in some cases. So yeah, all these reasons, I think, make it more difficult.
- [40:51]
B
But is all this a reason to second guess yourself and keep putting off retirement because you fear that you won't be able to reverse that decision?
- [40:59]
A
Yeah, this is the one more year problem where people say, oh, one more year and I'll be able to put aside this much more money, so I'll just delay it for a little bit longer and that just stretches out for
- [41:10]
B
years at a time and then they do die at their desk. And they never got to go on that cruise. The penguins were unseen.
- [41:21]
A
So that's all of our listeners now. Will unsubscribe.
- [41:25]
B
See you next week. Thank you for joining us for Many Happy Returns. Keep sending us your questions, no matter how dumb, @mhrtioncraft.com and do remember to
- [41:36]
A
check out pensioncraft.com for all the information about our membership courses and investment coaching options.
- [41:43]
B
Many Happy Returns is a Pensioncraft production co hosted and executive produced by Romin Nikiza and Michael Pugh. This podcast is for informational and entertainment purposes and is not financial advice. We do not provide recommendations or endorse any decision to buy, sell or hold any security. We cannot be held responsible for any actions listeners may take and investors are encouraged to seek independent financial advice.