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Beyond Pension Pots: A Holistic Approach to Retirement Planning

Writer's picture: Neil DissanayakeNeil Dissanayake

Updated: Oct 4, 2024

Balancing human and financial capital

The retirement landscape is changing. Recent discussions on retirement planning, particularly the Resolution Foundation’s “Living Pension” report, have focused heavily on the size of the pension pot required for a basic standard of living at the State Pension Age (SPA). The report highlights the significant increase in savings required for retirement due to rising inflation and costs of living. According to the report, the average pension pot needed to support a basic standard of living has risen from an estimated £68,300 in 2021 to an estimated £107,800 in 2024 ​(based on assumptions set out in Living-pension). While this focus on financial capital is crucial, it overlooks some key components of long-term financial health.


The Importance of Property Ownership

One key takeaway from the report is how property ownership can significantly impact financial security in retirement. For homeowners, the report estimates that the Full UK State Pension would currently cover 79% of the “Minimum Income Standard“ (MIS) for a single person, and over 100% for couples. In contrast, private renters see this drop to 52% for singles and 75% for couples. The MIS is described as the cost of achieving a socially-acceptable minimum standard of living in the UK today, based on what members of the public think.


This result highlights the importance of owning your home and paying off your mortgage, as a critical strategy for financial security in retirement. Think of property ownership as a lifetime, inflation-linked annuity, on the rental expenses that you no longer need to pay.


Beyond the Financial: The Forgotten Piece of the Retirement Puzzle

The report encourages individuals and employers to commit to a “Living Pension” standard, ensuring that workers save enough during their employment years to meet their basic retirement needs. However, by focusing only on the accumulation of financial capital, the current pension model does not account for the potential to extend earning capacity well beyond the SPA. This is especially relevant given that more than half of people approaching retirement express a desire to continue working beyond SPA, often to supplement their income or maintain a comfortable standard of living (see research by Vanguard and BoringMoney).


Retirement planning isn’t necessarily just about building up a nest egg anymore. Instead, it's about creating a sustainable livelihood that can extend beyond the traditional retirement age. A sustainable livelihood means more than just financial security; it involves continuing to contribute and harnessing the value of human capital—skills, relationships, health and accessibility—for a fulfilling post-retirement life.


Growing numbers of people approaching retirement express the desire to continue working beyond retirement, using their skills and experience to supplement their income and maintain a comfortable lifestyle. Investing in and utilising human capital is often the forgotten piece of later life financial planning.


Combining Financial and Human Capital for a Sustainable Future

A blended approach that incorporates both financial and human capital could offer a more sustainable solution to the retirement challenge. While financial savings are essential, investing in skills, health, and social networks allows individuals to continue contributing economically and maintain a better quality of life post-SPA.


This combination could help in keeping up with the rising costs of living in retirement, which have increased significantly since 2021 ​(see analysis in Living-pension). Earnings from continued work tend to adjust for inflation, which can supplement fixed pension incomes that otherwise might struggle to meet rising living expenses.


One key point that the Living pension report highlights is how their results are highly dependent on financial assumptions made around future investment returns, interest rates and inflation.  It also notes that there could be volatility in their calculations from year-to-year.  Looking forward to the future, society is aiming to rapidly reshape the global economy, whilst at the same time incurring the significant costs of ever-increasing climate change and biodiversity loss. There are fundamental reasons why we could expect more volatility and uncertainty than ever before.


The benefits of your pension savings alone are therefore likely to become increasingly uncertain. Investing in human capital could be one way to help make you more resilient to this uncertain future. Furthermore human capital could also help in solving a problem of lack of financial preparedness.


Nearing Retirement Without a Plan: A Worrying Trend

The recent study by Vanguard in partnership with BoringMoney, found that a staggering 62% of people planning to retire within the next year do not have a proper plan in place. Furthermore, an additional 25% of respondents admitted to not having factored in the tax implications of their retirement. The study also showed that a majority of individuals start planning for their retirement only 3-5 years before their intended retirement date. Most surprisingly, despite a desire to reduce work hours gradually, most retire completely on a pre-set date.


These findings underscore the need for early and thorough planning, crucial in ensuring financial security and desired lifestyle in retirement. But what happens when you leave it too late, and you discover your pension falls short?


While it’s natural to feel despair when faced with such a situation, there are paths forward. By refocusing on human capital—your skills, relationships, health, and learning—you can find ways to keep financially, emotionally, and mentally active and productive.


Here’s how:

  1. Reframe Retirement: Use this phase of life as an opportunity to engage in work that excites you, leveraging your experience and skills to continue generating income and staying mentally sharp.

  2. Prioritise Health: Maintain good physical and mental health to enable ongoing contributions and enjoyment of life in later years.

  3. Strengthen Your Network: Relationships provide support and open doors to new opportunities. Reconnecting with old colleagues or joining new professional groups can be invaluable.

  4. Embrace Lifelong Learning: Continual learning can keep you relevant in today’s fast-paced job market.

  5. Maximise Your Assets: Consider how your property or business can supplement your income without sacrificing your lifestyle.

 

A New Vision for Sustainable Livelihoods

In a world where traditional pensions may not provide the security they once did, there is a need to adapt, but also find ways to make your retirement meaningful and fulfilling.  Focusing on human capital opens up new avenues for sustainable livelihoods in retirement, whether it be from part-time work, freelancing, or even business creation. It's not about working longer—it's about finding work that aligns with your passions, blurring the line between work and play, and where you can contribute uniquely and wholeheartedly. If you're passionate about the planet, there are also plenty of opportunities to use your skills for its betterment and create a meaningful, lasting legacy along the way.

 

Where are you now with your finances?


Are your finances working well for both you and the planet? Take this quiz to find out more! - the Eco-Friendly, Financial Wellbeing Quiz.


(Images are AI-generated)


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