When asking clients what retirement looks like for them? The answer is usually “I’m not sure”, “I haven’t thought about” or “I would like to retire early but I most probably can’t afford it”.
You should start thinking about your retirement as soon as possible and never put it off. Everyone thinks retiring is a long way off, but unfortunately, it soon comes around. Therefore, having a plan in place is key to ensuring that retiring early isn’t just a dream but a reality. The earlier you put a plan in place, the higher your chances are of succeeding but even if you are in your fifties before you start to plan, it’s not too late! So, don’t delay, make some time to get your pension pot and retirement plans in sync. There is a chance that as you reach middle age, your earnings are at their peak and you’ve paid off some of your biggest expenses, like your mortgage, or you are certainly making inroads in doing so.
Step 1 – Financial Planning – Where to Start
Ask yourself what income you would need or like to retire on? Whilst this sounds like a simple question to answer, many people find this difficult and struggle to find the answer to, but the Pensions and Lifetime Savings Association (PLSA) believe that income can be put into three categories for a single person or a couple. They are Minimum, Moderate and Comfortable living standards.
A single person will need about £11,000 a year to achieve the minimum living standards, £21,000 per annum for a moderate living standard, and £34,000 per annum for a comfortable living standard. For couples it would be following the same order as above but £17,000pa, £31,000pa and £50,000pa.
It’s a good idea to make a budget for your retirement, as this could help with your own future spending requirements. Do ensure you refer back to the above figures for guidance but remember everyone will be different.
You could break this down further as follows:
Essential Expenditure – Basic cost of living needs, heating and eating. The things you cannot live without.
Non- Essential Expenditure – This money is for luxury items such holidays and leisure.
Step 2 – What is your income in retirement?
It is also important to understand where your income will be coming from in retirement and forecast how much you will receive. This enables you to plan ahead successfully,
State Pension
You can obtain your State Pension entitlement statement by registering online for your Personal Tax Account. This will give you an estimate on how much state pension income you should expect to receive, based on the level of your National Insurance contributions so far.
Workplace and Private Pension
You can ask your workplace and private pension providers to provide you with values, along with a projection of the likely pension income you will receive.
If you have lost track of any workplace or private pension details, the Pension Tracing Service is a free government service. It searches a database of more than 200,000 workplace and personal pension schemes to help you to find the contact details you need.
You can phone the Pension Tracing Service on 0800 731 0193 or use the links below www.gov.uk/find-pension-contact-details and www.findpensioncontacts.service.gov.uk
Savings and Investments
Whilst not specifically used ‘for retirement’ ISAs, stocks and shares, premium bonds, bank accounts or other savings could feature in your planning and allow you to leave your pension intact until later on.
Property
This could be rental income from property you own. Or you might plan to sell your property and raise money to supplement your income.
Step 3 – When to Retire
The key to Steps 1 and 2 above is to establish if you have any shortfalls against your income target. Now you need to plan when you might begin to receive these benefits.
Firstly, you can find out your state pension age via your personal tax account, that you have just registered for earlier.
Secondly, if you have a defined benefit pension (Workplace Pensions), they will typically begin paying you a guaranteed income from your normal retirement age under the scheme. This will often be age 60 or 65 but check with your scheme.
Finally, if you have a defined contribution pension (potentially private pensions), where you have built up a pot of money, these can normally begin from the age of 55.
All of this will help give you a realistic age when you could potentially retire.
Once you have your established your retirement age and income, you now have an initial plan for your retirement. Don’t panic if your pension savings aren’t where you thought they’d be, you may well still have time and steps you can take to help you retire on your own terms.
Remember, the plan you start with doesn’t have to be set in stone, see it as a moveable target that you can now influence accordingly to what life deals you. This is made easier now you understand your current position and the target you are aiming for.
The key is having your plan in place and to keep reviewing it.
Regular Reviews
With every plan, one of the most important aspects is to keep it on track, so do not underestimate the importance of having regular review meetings with a qualified Financial Adviser. You will be able to see if your retirement plan is on track and if not, what things can be adapted or changed.
A Financial Planner will ensure you are using all the tax efficient benefits available to you and regular meetings with them allows for a financial review to take place. As you turn 55, these meetings become invaluable in your financial planning to allow you to explore your options and make changes, if necessary, as you are approach retirement.
When reviewing your plan, it is always good to see it on paper. At Francis Clark Financial Planning, we like to help you visualise your plan by using a ‘cash flow’ model tool. This will really help to give you reassurance and confidence in the knowledge that you can afford to retire when the time comes and may also allow a dream of retiring earlier a reality.
