Managing your money in retirement - 5 golden rules to follow to avoid a shortfall

Retirement overspenders are rising with a fifth of Brits saying they are spending more money in retirement than they had planned for, research shows. 

PensionBee found that the high cost of living environment has escalated this for many, with 11% saying their overspending started fairly early on in retirement and could mean they face a pensions shortfall. Helping younger family members also added to their costs. 

Becky O’Connor, director of public affairs, PensionBee, commented: “Overspending in retirement is a real risk. It can be hard to know how much you are likely to spend. With living and home maintenance costs often exceeding expectations, a significant chunk of today’s retirees are overspending.”

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

While good retirement planning, such as adopting the 4% pension rule, can help ensure you have enough to retire on and manage unexpected costs, a cash management strategy can also help make sure your funds do not run dry, while avoiding any shocks or nasty surprises. 

How to manage your tax-free pension money 

You can take up to 25% of your pension pot tax-free, but before you withdraw the cash, it is a good idea to put some measures in place. This includes:

1. Building emergency savings that cover 1 - 3 years of your essential spending. According to financial services firm Hargreaves Lansdown, for the average person aged 60 or over, this is between £16,680 and £50,040. 
2. Making a plan to avoid spending it frivolously. Remember, if you do not need the cash immediately, then there is no obligation to take the lump sum immediately or even all at once. 
3. Thinking about what income you may need later on in your retirement. You can either opt to buy an annuity or consider drawdown, but the more cash you take now, the lower your ongoing income will be. 
4. Protecting your cash from the taxman by making use of an ISA, which can be easy-access or even fixed-rate ISA. 
5. Protecting your money from IHT, too. Money in a pension is not subject to IHT, so if you do not need the cash immediately, keeping it in your pension pot makes good sense. 

Sarah Coles, head of personal finance at Hargreaves Lansdown, comments: “Your cash savings may not get much of a look-in during retirement planning: they tend to play second fiddle to your pension. However, if you’re not careful, there are five horrible mistakes you can wander into, so it’s worth knowing what you need, how you’re going to build the kind of nest egg that will protect you as you get older, and the best way to ensure it’s put to good use."

How much do I need to retire comfortably? 

Around 30% of people have no idea how much pension they will need, research shows. 

MoneyWeek Masterclass: Pensions - how to get started - YouTube

Watch On

According to the latest figures from the Pensions and Lifetime Savings Association (PLSA), if you are looking for the bare minimum in retirement, you will need at least £14,000 a year as a single person or £22,000 as a couple, on average. This will cover your basic needs, with a little money potentially left over for entertainment. 

For a moderate lifestyle, the PLSA estimates you need £31,000 as a single person or £43,000 as a couple. This allows you to cover your needs, leaving a little extra for foreign holidays and eating out. 

For a comfortable retirement, the body suggests an average pension income of £43,000 if you’re single or £59,000 for a couple. This level will allow you to be spontaneous with your spending and give you more to enjoy things like holidays, mini-breaks, eating out or even treating the grandchildren. 

Some research even suggests people may need to accumulate a pension pot of £1 million to retire comfortably, taking into account housing costs and living costs which are still high for many households.

If you think you may have a shortfall, then take a look at our piece on how you can boost your pension pot by at least £23,000 with some modest cash injections. Married couples can also boost their retirement income by over £400,000 by making use of each others’ tax allowance.