It's official: we really are retiring later. But what to do?
Here at The Motley Fool, we cover retirement-related issues quite often.
And there's a reason for that: as investors, retirement is one of the prime considerations that we all have in mind when we invest.
Not for us, we hope, the grinding poverty of an extended old age.
Fact or fiction?
Yet in truth, the vast ongoing pensions debate lacks hard facts at times. It's a fact that we're all living longer, for instance -- official government statistics back that up.
But official data on savings and investment provision is hard to come by. The Office for National Statistics' first and only study of wealth in Great Britain came out in late 2009, based on data collected in 2008.
And another supposed 'fact' -- that we'll all have to delay our retirements, in order to save more for our pensions -- generally turns out to have a basis only in the various surveys carried out by those in the pensions industry with an axe to grind.
Last week, for instance, insurance company Prudential (LSE: PRU) revealed that it had estimated that more than one in ten of the 550,000 people who were due to retire this year had changed their plans. While some had done so because they enjoy working, the vast majority were putting it off because they couldn't afford to retire as planned.
Coincidentally, official data has been released that endorses this view. Which, I think, is quite significant.
In short, the message from the pensions industry isn't just scaremongering hype from parties with a vested interest, but is hard, official fact.
Which does, I think, make a difference.
In other words, if you're tempted to dismiss pension industry-generated 'news' as self-serving hype, do so no longer. Delayed retirement is real, and is happening to people like you.
A year longer
Simply put, in 2010 -- the latest year for which data is available -- the average age at which men left the labour market rose to 64.6 years, up from 63.8 years in 2004. For women, it rose from 61.2 years in 2004 to 62.3 years in 2010.
Put another way, across the two genders, people are retiring almost a year later than they were just six years earlier -- with the charts showing no sign of the trend reversing or slowing down. Indeed, for women, the age of withdrawal from the workforce appears to be accelerating faster than it is for men.
And what's especially interesting about this is that for the cohort in question, government-mandated extensions to the retirement age haven't affected the data.
In other words, it's economics forcing a later retirement age, and not the rule book.
What to make of all this? For me, the lessons are simple.
One of the great things about investment-generated wealth is the enhanced freedom of choice that it provides.
And in this case, the choice in question is when -- and how -- to retire. As late as possible, in order to eke out meagre savings and an equally meagre State Pension? Or -- within limits -- when we like, with our standard of living buffered by a decent and rising investment generated income?
I know which option I prefer.
SIPP or ISA?
What to do? It's easy to spot what not to do.
Pension funds often have high charges. Even stakeholder pensions still take a slice of your money -- and in a low-return environment, 0.6%-0.7% of your fund value is quite a hit. Cash ISAs? Well, net real interest rates are currently negative, so no joy there then. Property? Popular, yes, but illiquid. And so on.
In fact, to my mind, there are only two sensible courses of action.
- Save for retirement in a stocks and shares ISA, benefiting from the higher returns that the stock market offers. Individual shares too risky? Sensible diversification and a long-term perspective go a long way. Failing that, there are funds or simple low-cost index trackers.
- Save for retirement in a SIPP. With the same investment options as an ISA -- funds, shares or trackers -- a low-cost SIPP offers tax relief, currently at your highest marginal rate. Which is especially attractive if you're a higher-rate taxpayer now, but likely to be a basic rate taxpayer in retirement.
> Get the latest on investing and the markets from the desk of David Kuo -- join The Motley Fool Collective today.
More from Malcolm Wheatley: