Can you afford to retire next year? 4 questions to ask yourself

No matter how passionate you might be about your career, there’ll likely come a time when your focus switches to other priorities. Perhaps you’re keen to spend more time with your grandchildren, or maybe you’re impatient to start ticking items off your bucket list?

If your children have flown the nest and many of your friends are already retired, you might start to wonder whether you too can leave work behind and start the next phase of your life.

Unfortunately, new research published by Financial Planning Today reveals that 70% of UK professionals expect to delay retirement due to financial concerns. Moreover, 31% of those who have returned to work after retiring have done so in the last 18 months, with 46% of those claiming they made this decision for financial reasons.

That’s why – before making any big decisions – it’s crucial to ensure you have enough savings and investments to fund the lifestyle you want for as long as your retirement lasts. This could help you avoid common retirement regrets, such as those reported by Which?, including ‘Not saving enough’ and ‘Retiring too early (or too late)’.

If you’ve started to wonder, ‘Can I afford to retire next year?’, here are four key questions that could help you decide.

1. What do I want my retirement to look like?

Before you can accurately assess whether you have enough money to leave work behind in 12 months’ time, you need to have a clear idea of your retirement income needs. This means thinking carefully about what you want to do with your retirement.

Do you see yourself travelling the world and living out long-held dreams? Are you excited to revive old hobbies and dine out with friends more often? Or is spending more time with family and enjoying relaxing at home at the top of your agenda? Maybe all of these sound good to you!

Clarifying your top priorities for this next stage of your life will help you understand how much money you need in your retirement fund – and therefore, whether you can afford to leave work next year.

2. How much will my preferred lifestyle cost?

Now that you have a clear picture of how you want your retirement to look, a useful next step is to calculate how much this lifestyle might cost.

If the thought of estimating your income needs for your whole retirement sounds daunting, the Retirement Living Standards published by Pensions UK provide a helpful jumping-off point.

For example, a ‘moderate’ lifestyle costs around £31,700 for a single person and £43,900 for a couple. This would allow for all essential costs, plus eating out several times a month and a two-week holiday abroad. A ‘comfortable’ lifestyle that offers greater financial freedom and more luxuries costs on average £43,900 for one person and £60,600 for two people.

While these guidelines are a useful place to start your calculations, it’s important to note that your actual retirement income needs will depend on your specific goals and lifestyle expectations (step one).

What’s more, your spending in retirement may change over time.

Many people spend more in early retirement when they’re busily living out long-held dreams before outgoings plateau or dip in mid-retirement. Costs may rise again in later years due to factors such as increased healthcare costs. This is known as the ‘retirement smile’.

3. How long is my retirement likely to last?

The length of your retirement will have a significant impact on how much money you need to fund it. As such, it’s important to consider your life expectancy when assessing whether you’ve built enough wealth to leave work behind in 2027.

According to Pensions Age, many people underestimate their lifespan when planning for retirement. Research findings show that men are likely to live four years longer than they expect, while women underestimate their life expectancy by seven years.

As such, ‘longevity risk’ – outliving your savings and investments – is one of the most significant retirement challenges.

While no one can predict their exact lifespan, here are several steps you can take to make an accurate estimate of how long your retirement might last:

• Use average life expectancy figures as a baseline – The Office for National Statistics’ life expectancy calculator provides average estimates based on your current age and gender.
• Look at your family history – Factors such as how long your parents and grandparents lived and their health histories could be strong indicators of your potential lifespan.
• Consider your lifestyle – If you maintain a healthy weight, keep active, and avoid potentially harmful behaviours such as smoking, your life expectancy might be higher than average.

Your financial planner can use sophisticated cashflow modelling software to stress test your retirement plans against different life expectancies. This could give you a clear picture of whether your finances could support a retirement that lasts until 80, 90, or beyond, if you give up work next year.

Read more: Cashflow planning: What is it and how could it help you retire with confidence?

4. Where will my income come from?

Now that you have a solid understanding of your retirement income needs, it’s time to review all your assets and sources of income to see if retiring in 2027 is a realistic option. These might include:

• ISAs and cash savings
• Inheritances or family gifts
• Workplace and private pensions
• A State Pension, if you’re eligible
• Investments such as stocks and shares, rental property, and so on
• Ongoing earnings, for example, from part-time or consultancy work.

You might also want to consider freeing up capital to supplement your income, for example, by downsizing your home.

Creating a well-diversified retirement income that draws on a combination of these assets, savings and investments could allow you to manage risk effectively and stay as tax-efficient as possible.

If, once you’ve crunched the numbers, it looks like retiring next year could lead to a shortfall in your income later in life, don’t despair. Your financial planner can help you explore different options – such as restructuring your investments or opting for a phased retirement – and make informed decisions about your future.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate cashflow planning or tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pensions Regulator.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.