Retirement is one of the biggest financial decisions you will make. After years of working and building up your pensions, savings and investments, deciding when and how to retire can feel both exciting and daunting.
It’s natural to ask questions such as “Can I afford to retire?”, “How much do I need?” and “Will my money last?”
Good retirement planning isn’t simply about building the biggest possible pension pot. It’s about understanding what you have, what you are likely to need and how your money can support the lifestyle you want. Most importantly, it is also about enjoying your hard saved wealth.
Here are five things to consider when planning for retirement:
1. How Much Are You Likely to Spend?
The first question to ask is perhaps the most important:
How much will I need to live on in retirement?
It can be difficult to answer because your spending may change significantly once you stop working.
Some costs may fall. You might no longer have commuting costs, work-related expenses or regular pension contributions.
Other spending could increase. You may want to travel more, enjoy new hobbies, eat out, improve your home or spend more time with family and friends.
It’s therefore worth thinking about what your retirement lifestyle might look like and what that lifestyle could cost.
It can also be useful to think about retirement in different stages. You may spend more during the early years of retirement when you’re fit and active, with your spending potentially changing as you get older.
Cashflow planning can help
Cashflow planning can help you visualise how your finances could develop over time.
Rather than simply looking at your pension value today, a cashflow plan can bring together your pensions, investments, savings, income and expenditure to illustrate how your financial position could look throughout retirement.
It can help you explore different scenarios, such as retiring earlier, spending more in the early years or helping family financially.
2. How Big Should Your Pension Pot Be?
A common question we hear is:
“How big does my pension pot need to be to retire?”
Unfortunately, there is no single figure that works for everyone.
Someone who wants a relatively modest retirement lifestyle will have very different requirements from someone who wants to travel extensively, maintain a second home or provide financial support to their family.
Your required pension savings will depend on a range of factors, including:
- Your desired retirement income
- When you want to retire
- Any guaranteed retirement income you may have
- Your existing pension savings
- Your State Pension entitlement
- Other investments and savings
- Whether you have a mortgage
- Your expected spending
- How long your money may need to last
It’s also important to remember that your pension isn’t necessarily the only source of retirement income. You may have ISAs, investments, cash savings, property or other assets that can form part of your overall retirement strategy.
Instead, consider your entire financial position and the income it could potentially provide.
A detailed retirement cashflow plan can help you understand whether your current savings are on track and what adjustments you may need to make before retirement.
3. What Options Do You Have With Your Pension?
Once you’ve built up your pension savings, you need to think about how you will use them.
Modern pensions can provide considerable flexibility, but that flexibility also means there are important decisions to make.
Depending on your circumstances, you may have options around:
- When you start taking your pension
- Taking a tax-free lump sum
- Taking regular income
- Taking flexible withdrawals
- Using pension funds to provide a guaranteed income
- Leaving some money invested for later
- Combining different pension arrangements
For some people, securing a guaranteed income for essential expenditure may provide peace of mind. For others, flexibility and maintaining investments may be more important.
You may also have several different pensions from previous employers.
Before transferring or consolidating pensions, it’s important to understand whether any existing arrangements contain valuable benefits or guarantees that could be lost.
Pension advice can make a difference
Your pension is likely to be one of your most significant assets, so the decisions you make about it can have long-term consequences.
Understanding your options before you start taking benefits can help you make decisions that fit with your wider retirement plan.
4. Don’t Forget Inflation
When planning for retirement, it’s easy to focus on today’s cost of living.
But retirement could last 20, 30 or even 40 years. Over that period, the cost of goods and services is likely to rise.
Something that costs £100 a month today could cost significantly more in the future. Consider the cost of buying a house, a new car or even just doing the weekly shop 20 years ago to now.
That’s why inflation should be included in your retirement planning.
It is particularly important when thinking about the income you will need later in life.
For example, if you want to maintain a particular standard of living, your retirement income may need to increase over time to keep pace with rising costs.
Inflation can also affect your investments and the real value of your savings. Therefore, your financial plan should consider a range of potential outcomes.
What if inflation is higher than expected?
This is another area where cashflow planning can be useful. You can test different assumptions and see how changes in inflation could affect your future income and wealth.
It can help you understand where you may have flexibility and whether you have sufficient financial resilience. It can also highlight a need for investment, seeking to keep pace with inflation using funds you do not need in the short term.
5. How Will You Enjoy Your Free Time?
Perhaps the most overlooked part of retirement planning is also one of the most important.
What are you going to do with all the free time?
Retirement isn’t simply a financial event. It’s a lifestyle change.
After decades of working, suddenly having much more control over your time can take some getting used to.
Think about what you want your retirement to look like.
Perhaps you want to:
- Travel more
- Spend time with family and friends
- Take up new hobbies
- Play more golf
- Volunteer
- Work part-time
- Learn something new
- Spend more time outdoors
- Help look after grandchildren
- Simply enjoy having more freedom
Your plans don’t have to be extravagant.
The important thing is to think about what will make retirement enjoyable and fulfilling for you. It is a shame to have the freedom to do anything but doing nothing.
Your retirement plan should therefore be about more than “Can I afford to stop working?”
It should also ask:
“What kind of life do I want to create when I have more freedom?”
Planning for a Retirement You Can Enjoy
There is no universal answer to how much you need to retire or when you should stop working.
The right answer depends on your circumstances, your finances and the lifestyle you want.
The five things to consider are:
- How much are you likely to spend?
- How big should your pension pot be?
- What options do you have with your pension?
- How will inflation affect your plans?
- How will you enjoy your free time?
Considering these questions well before your planned retirement date can give you greater clarity and confidence.
A good financial plan isn’t something you create once and never revisit. It should evolve as your circumstances, priorities and aspirations change.
Retirement Planning in Nottingham and the East Midlands
At Symmetria Financial Planning, we provide independent financial advice to clients in Radcliffe-on-Trent, Nottingham, West Bridgford and across Nottinghamshire and the wider East Midlands.
Our retirement planning service brings together pension advice, investment planning, tax planning and cashflow planning to help you understand how your finances could support the retirement you want.
If you’re starting to think seriously about retirement, whether that’s in the next year or the next ten years, we’d be happy to help you understand your options and create a clear plan for the future.
Get in touch with Symmetria Financial Planning to start planning for the retirement you want.
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