Retirement planning explained
Put simply, this is the process of ascertaining your retirement goals and the actions needed to achieve these – essentially your how and when.
- The most important thing to remember – start early. The earlier you start contributing, the longer you have to build for a comfortable retirement.
- Planning for different eventualities is vital to establish not only your sustainable level of income but also your lifestyle in retirement.
- Key things to consider are your sources of income, estimated expenses, the adherence to a saving plan, and lastly, the managing of your investments.
- It’s common to hear the phrase ‘ageing population’ thrown about. With medical advances and the general improvement in our living standards, the age we are expected to live to is steadily growing. This means making your money last longer.
- As you get older, more time and effort should go towards your retirement planning, filling in where best, any shortfalls.
- When you come to reaching the final few years before you plan to retire, you should set out a more specific plan for things like taking your pension, changing or withdrawing your investments and budgeting.
Consider your retirement lifestyle
There is no magic number to aim for, one consensus is two-thirds of your final salary to maintain your current standard of living when retired, whilst others will aim for a desired annual income by applying the ‘Multiply by 25’ rule, essentially desired annual income multiplied by 25.
- Clearly, looking at these rule of thumb options, the sooner you start the closer you will be to reaching your target.
- According to research conducted by Which?, a two-person household needed £27,000 per year for a comfortable retirement. This afforded the basic areas of expenditure, along with some luxuries like a European holiday, hobbies and eating out.
- For those aiming for a luxurious retirement, Which? estimated the same two-person household needed instead £42,000. This afforded additional luxuries such as long-haul travelling and a new car every five years.
- Using these as rough guides will help you map your retirement savings, making your goals more manageable.
What will your income be in retirement?
As you approach retirement, you will start to get a better estimate of what your income will look like. Whilst you can do things to increase your income, the nearer you are to retirement, the less impact this will have. In your last few years of working, the amount you calculate here will be close to the reality when you eventually retire.
Assets and Income sources to include are:
- State pension
- Part-time work
- Workplace pension schemes
- Private pension plans
- Cash savings, including ISAs
- Properties rented out or sold
- Equity Release
- Other investments you plan to cash in
- If you reached state pension age before 6 April 2016, the most you will receive is £129.20 a week, which adds up to £6,718.40 a year.
- If you reached retirement age after 6 April 2016, you should get the new state pension of £168.60 a week, which is £8,767.20 a year.
- You will typically need to have 10 qualifying years on your National Insurance record to be eligible for any of the new State Pension.
- If you were contracted out of the state pension before 6 April 2016, you may receive less than the new full State Pension. Additionally, you could receive more than the new full State Pension, if you would have previously received over a certain amount of Additional State Pension under the old rules.
- To qualify for the maximum amount, you will need to build up 35 years of national insurance contributions.
Defined benefit pension
- Individuals who will receive a defined benefit (or “final salary”) pension when they retire should have a clearer idea of their income.
- A defined benefit pension will pay out a secure, regular income throughout your retirement.
- The amount will depend upon a number of factors, including the number of years you’ve been employed, your age and the scheme’s accrual rate – the percentage of your salary you’ll get as an annual retirement income.
- A defined benefit may pay you in line with your final salary earnings before retirement, or take an average over your career earnings.
- Both you and your employer will pay into your pension plan throughout your career.
- It is up to your employer to ensure the pension pot has enough to pay your pension income throughout retirement.
- You should regularly receive a statement from your pension provider which gives an indication of how much you will have in retirement.
Once you know what your annual income in retirement is likely to be, this will help you prepare for the day you retire and will inform the budget you will have to live on.
Make your retirement savings go further
This section will discuss some of the things that can be done in the last few years of your working life to provide a higher income in retirement:
Increase your contributions
- Although this seems obvious, a large injection of savings in the last few years of working can make retirement considerably more comfortable.
- This, of course, requires people paying into their pension to be able to afford this additional income.
- Cutting back on other expenses for a few years can allow you to increase your monthly contributions or even pay in larger lump sums.
Delay your retirement date
- While people may be reluctant to put their retirement date back, it’s important to consider the quality of life in retirement you want and can currently achieve.
- For those who are likely to struggle to reach their goals for retirement, delaying by 3-5 years could help to make life more comfortable. Working part-time may even be an option.
- By leaving your funds untouched for a longer period of time, allowing for compound interest to empower your fund growth, you can make your money go further.
Retirement-proof your investments
- As retirement approaches, the investments you have worked hard to build should be protected.
- This includes your pension’s portfolio, any additional stocks and shares you own and property.
- If you are planning to sell any property to fund your retirement, start a few years in advance, as property sales can be a long and difficult process.
- Your portfolio of investments should be gradually moved towards safer options as you near retirement to remove larger swings in volatility. Increasing the share of your pension which is made up of government bonds and cash is a sensible option.
Seek financial advice
- Your retirement plan is one of the most important financial decisions you will ever have to make.
- It will set the financial path for the rest of your life and can be the difference between struggling financially in retirement and being comfortable.
- Because of how vital this is to your wellbeing, it is prudent to seek at least some financial advice.
- Financial advisors will particularly help with rebalancing your investment portfolio when approaching retirement.
- As it’s difficult to tell for sure how much time you will have in retirement, unlike your time until retirement, expert knowledge on budgeting will help you understand what you can control and will calculate your likely annual retirement income.
- Whilst there is plenty of free advice out there, paid-for advice is likely to be worthwhile when considering the importance and complex needs of retirement planning.
AAdvisory service Asset Asset Allocation Asset Manager
CCash ISA Central Bank Commodities Corporate Bonds
DDebt Discretionary Dividend
EEquity Exchange traded fund
FFCA Financial Adviser Financial Instrument Financial Planning Fixed Allocation FSCS
IIndependent Financial Advisor Inflation Investor profile ISA
MMiFID Mutual fund
PPension Portfolio Price/Earnings Ratio Purchase Managers Index
RRebalancing Retirement Planning Return Risk
TTotal expense ratio
VValue at risk Volatility