Aligning your target retirement age with your financial reality
Retirement is a milestone in life that symbolises freedom from the daily grind, allowing one to focus on the things one truly enjoys. Whether one imagines spending endless afternoons with family, travelling to new destinations, or exploring hobbies, these dreams rest on a solid financial foundation built over decades of work and planning.
However, retirement is not solely about financial figures; it requires aligning practical financial goals with your desired lifestyle and target retirement age. By carefully assessing your readiness and addressing any gaps, you can enhance your confidence in retirement planning. So, what are the key aspects of preparing for retirement that can help ensure you have a comfortable future?
Define your retirement vision
Retirement varies for everyone, so the first step is to clearly visualise what it means to you. There is no universal template for how this phase of life should unfold. Your unique preferences and circumstances will determine how you prioritise your time and resources.
Would you prefer tranquil days in a rural setting, or are you attracted to the prospect of relocating overseas to enjoy warmer climates? Perhaps your vision involves dedicating your time to a passion project, acquiring new skills, or giving back through volunteer work. A growing trend is phased retirement, wherein you gradually reduce your workload, transitioning from full-time to part-time work or even consultancy roles.
A clear vision of your retirement lifestyle enables you to estimate the financial resources required to make those dreams a reality. Without this clarity, it is difficult to ascertain what you need and plan accordingly, so take time to outline it.
Plot out your retirement expenses
Once you have a strong understanding of what retirement looks like for you, the next step is to assess the costs required to achieve it. Categorise your expenses into two main groups – essentials and non-essentials. This enables a more structured review of your budget.
Essentials include the predictable, recurring expenses that must be accounted for throughout life, such as rent or mortgage payments, food costs, utility bills, transportation, insurance, and healthcare services. Non-essentials, on the other hand, centre around elements that bring joy and fulfilment to retirement life, such as holidays, leisure activities, dining out, and unsupported hobbies.
It is worth noting that spending patterns typically change over the course of retirement. The early years of retirement are often more active, characterised by higher expenditure on travel and activities. Conversely, in later years, spending on healthcare and personal care may increase.
Obtaining professional financial advice early on will assist you in identifying and quantifying these expenses. This will also enable you to account for cost fluctuations due to inflation, allowing you to anticipate challenges that may arise in the future.
Understand your pension and savings
Your retirement expenses provide a financial goalpost, but reaching this goal depends on the savings and income streams you’ve built. That’s where evaluating your pension and savings becomes essential.
A pension typically forms the backbone of retirement income. To determine whether your savings are sufficient, you will need to calculate the size of the pension pot required to meet your projected expenses. Factors such as your life expectancy, the rate of investment growth, and the effects of inflation all play significant roles in this equation.
Ask yourself questions like:
Should I take my pension at the State Pension age, or delay to benefit from higher payments later?
What are the tax implications of accessing my pension, particularly if I withdraw a lump sum?
How much risk can my investments sustain as I approach or enter retirement?
Working with your professional adviser will enhance the decision-making process. They can simulate different scenarios, predict long-term outcomes, and propose strategies customised to your goals.
Assess and close savings gaps
Not everyone’s savings align seamlessly with their retirement goals. If you discover a gap, don’t worry, there are multiple ways to address it, no matter how far along you are in your retirement planning.
Start by identifying ways to increase your pension contributions. If you’re still working, take full advantage of any matched contributions from your employer and consider any tax relief available on your pension savings. A financial adviser can guide you in setting up an efficient contribution plan.
Alternatively, extending your working years can make a substantial impact. Even a few extra years of employment can allow your investments more time to grow, while reducing the years you’ll need to draw from savings. Transitioning to part-time work is a good balance for many, enabling continued income without the demands of full-time hours.
Don’t forget alternative savings options, such as Individual Savings Accounts (ISAs), which can provide a flexible and tax-efficient way to build a supplementary retirement fund. Combining your pensions with these savings and the State Pension offers a broader financial safety net.
Factor in the State Pension
Though rarely sufficient on its own, the State Pension provides an essential baseline for many retirees. Take time to familiarise yourself with your State Pension entitlement, which depends on your National Insurance contributions.
The full State Pension offers a guaranteed income for life, adjusted annually in line with inflation, but benefits vary depending on your individual contribution history. If you have gaps in your record, you may be able to make voluntary contributions to increase
your entitlement.
Understanding how your State Pension interacts with private savings can unlock opportunities for better financial planning.
Ensure you stay on track
Once your retirement plan is in motion, it’s important to review it regularly. Financial circumstances, personal priorities, and market conditions can all change, making it necessary to re-evaluate along the way.
For example, you may want to seek periodic advice on adjusting your investments or responding to new tax legislation that could impact your finances. Staying adaptable ensures your retirement strategy remains relevant and effective no matter what life throws your way.
