By Ross Martin, Accountancy Director at Hive Business

I was scrolling through my newsfeed this morning and came across this article from the Telegraph. I wanted to share with you just how important it is to consider your retirement and how low interest rates could affect your current plans.

What if interest rates remained below, say,  2% forever?

Orthodox thinking used to suggest that, in retirement, a £1m asset pot would generate something in the region of £50k p.a. and also allow capital to be passed down to the next generation. With a mortgage-free home – a desirable, if arbitrary, target for many baby boomers.

However, a 65-year old who has successfully achieved a target £1m would today instead only be generating something more like £20k with current low savings rates and negative bond yields. To maintain desired living habits capital would, therefore, be eroded at £30k per annum.

Of course, many also planned or needed to gently draw-down capital anyway and at a previously planned rate of £20k per annum (i.e. now drawing down £50k per annum) a £1m portfolio is extinguished by age 85.

No hard-earning capital to be passed to enhance the next generation (or get them on the housing ladder) but perhaps more worryingly, zero margin for error with male and female life expectancy of a 65-year old now being an average 19 / 21  years respectively.

Granted their asset pot may be enhanced if, in addition, they also have second properties or are able to down-size following 15 years of rampant property price inflation, but not everyone’s circumstances are the same and nor was purchasing a property in 2001 obligatory.

If interest rates stayed low forever then today’s 35 year old, who hasn’t enjoyed any property price increases, has therefore, financially, chosen the worst time ever to exist; they face a steep ascent akin to the north face of the Eiger because, after they have first saved a deposit to buy their home, they may then need to accumulate £2.5m to be able to live off the same £50k per annum as their forefathers.

That works out to saving £83k per year if they want to retire at age 65.