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03 Aug 20
Retirement Planning: Preparing for Future Life
Unfortunately, financial security doesn’t just happen. It takes a great deal of preparation, planning, and commitment. Being retirement ready will undoubtedly pay off in the long run, and starting those preparations as early as possible is always the best advice for retirement planning. You must plan for every possible factor that could have an impact on your retirement income. As a result, some crucial decisions will need to be made.
Our team of Independent Financial Advisers at True Bearing Chartered Financial Planners have put together a guide to retirement planning that will help you get the most out of your pension to maximise your retirement income when you need it.
Why is Retirement Planning So Important?
Planning for retirement can be daunting, mainly because of how the pensions industry has changed over the last couple of years. Fewer people are enjoying the guaranteed income that comes with a final salary pension and annuities. Also, more people are waiting longer to qualify for their state pensions. At the time of writing, the state pension age is 65 for both men and women and will rise to 66 in October 2020.
So, you must ensure that you make a success of your retirement planning! The quality of your retirement planning is what will ultimately decide if you have adequate funds to live the lifestyle you want post-retirement.
How can you ensure that you have Adequate Funds When You Retire?
There are many reasons why retirement planning for future life is so important. These include inflation, increases in lifestyle expenses, and rising health issues, just to name a few.
We all know that the earlier you start your retirement planning, the better! Contributions will be more manageable, and you will allow yourself more time for your investment/savings to grow and increase in value.
What are the Best Ways to Plan for Retirement?
While there are usually different methods of retirement planning, depending on what age you start, there are things you should always keep in mind. No matter what age you begin planning for your retirement, we’ve listed some of the most important considerations below.
Track your Expenditure Before Retirement
The longer your retirement, the more you will need to have accrued. Gaining an insight into the amount you will need to live on while retired will help no-end with your plans in the long-term.
Some costs you may not have considered are increased heating costs, as you will be at home more. It’s also likely that you will spend more on activities and holidays to keep you occupied. Also, the cost of inflation will have an impact on your retirement funds.
While you are likely to have less money to live on than previously, bear in mind that you can take off costs that you used to incur but will no longer need to pay out in retirement, this might include commuting, work lunches, and work clothing.
Work out Your Likely Retirement Income
Once you’ve got a solid grasp of your regular expenditure/spending habits, it is time for you to start working out an estimated retirement income. This is how much you will have to spend in total once you retire, and you can work this out on a weekly or monthly basis. Start this as soon as possible, ideally at least two years pre-retirement. This may involve:
- Getting your State Pension Statement
- Obtaining an estimate on how much you could be entitled to from your workplace pension
- Adding up your savings and investments, including your pension and any other investment funds you may have
- Trace any lost pensions (you can use the Government-run Pension Tracing Service to help you with this)
Explore Options That Could Boost Your Pension
If your retirement planning hasn’t gone as well as you had hoped and you are now faced with the prospect of retiring with less money than you wanted to, there could be options available to you that will offer a boost to your pension.
You could start increasing the amount you pay into your pension every month. Alternatively, you could delay or push back the date on which you start withdrawing your pension. You could also choose to explore other ways to provide income for your retirement. You could perhaps even consider continuing to work part-time in retirement, an option that will provide additional income.
This is why we recommend that you start your retirement planning as early as possible. The longer you save for your retirement, the longer your pension pot has the opportunity to grow.
Ensure All Debts Are Cleared Ahead of Retiring
Make sure all your debts are paid off, or at least as many of them as possible. This may sound like an obvious one, but it is crucial to successful retirement planning. The most likely scenario, no matter how well your retirement planning goes, will see your disposable income decrease after retirement. That said, any fixed repayments resulting from outstanding debts will take up a more significant share of your income.
In a lot of cases, you can use the tax-free cash lump sum from your pension to pay off any outstanding debts. However, this may not be feasible if you have a defined benefit pension, as it can be costly. If you are unsure of which option is best for you and your retirement plan when it comes to debts, be sure to speak with an expert financial adviser.
Find Out When you Should Start Drawing your Pension
There is much more flexibility now in the ways people can access their retirement savings and how you can withdraw these funds. It is important to realise that you do not have to stop working in order to start taking your pension out or working it into your retirement plans.
It’s essential to keep in mind that the earlier you take your retirement, the longer your pension will need to last you. You may discover that the sooner you draw your pension, the less you may receive.
This again goes to show that if you start your retirement planning early, you will be able to manage your finances for the future better, allowing you to leave your pension for longer.
Budget for Changes in Day-to-Day Spending Post-retirement
Once you have factored in all the other aspects of retirement planning that impact your overall retirement income, it is time to start budgeting for your day-to-day spending once you’ve retired.
Your work-related costs, such as commutes, lunches, train fares, or petrol, etc., will likely drop off (either significantly or altogether, depending on your retirement plan). That said, however, spending may increase in other areas, such as running your house (heating, electricity, etc.) as well as any activities you may take up as part of your retirement.
In order to prepare yourself for these changes, it is worth drawing up a budget to see where your money comes from and where it goes. You’ll also need to consider making changes to your lifestyle that will help you account for your new financial situation in retirement.
Get Professional Advice to Finalise your Financial Planning
It is imperative that you seek expert financial advice when retirement planning. A financial expert can provide invaluable guidance in most, if not all, aspects of financial planning and can help you understand the choices/options available to you.