The old saying that ‘life imitates art’ could well be applied to DC retirement. In theory, like an old classical painting, things would be beautifully crafted and easy on the eye; members would save into a pot and, sometime post 65, start to drawdown (while taking some tax-free cash along the way) to enjoy the biggest holiday of their life. Happy days.
Each month from thereon in, a sensible amount, well within the percentages recommended by the industry, would be drawn down.
Unfortunately, this might be a load of old Jackson Pollock’s.
Why? Because at reaching 55, you could, for the first time, actually have access to money that can be used to clear off credit cards and loans, help your children fly the nest into their own place, and sort out that disintegrating kitchen? So, you take quite a chunk out of your pot. You can’t help it, and, frankly, it is your money after all.
While retirement may still be some way off, sorting your finances now, so that you’re prepared for the future, can certainly improve your mental (and financial) wellbeing.
It’s always been pretty clear how much financial worries can impact on mental health, performance at work, and our relationships. However, this has been hugely magnified by the pandemic, as many people over 55 have been forced to dip into their DC savings. In some cases just to survive, in others to clear off debt.
It shouldn’t be underestimated just how much clearing debt can improve mental wellbeing. For the first time, many people might actually feel like they aren’t living hand to mouth each month, with no end in sight.
As an industry, we must accept that this will be the reality for a lot of people. Maybe we should step back from warning members about their money running out and instead highlight the benefits (both mental and financial) of clearing expensive debt?
And if those withdrawals from the DC pot are much bigger and lumpier than has been assumed, maybe it’s time to be a little more realistic in our estimates?
At Redington, we spend a lot of time thinking about what sort of investments match the reality of people balancing the dilemma of life and money as well as helping our clients communicate this to their members. And alongside our strategic partner, QuietRoom, we’re also working hard on how communications can really help people, well, not feel too guilty about enjoying their hard-earned savings at the same time as educating them on the importance of saving into their pension pot.
If you’re a DC scheme and would like some help with your strategy or communication, we’d love to talk.