As Financial Planners, my colleagues and I meet with clients who have never given much thought before about when they will retire and what their life will be like at that stage. When we ask about what age they plan to retire, often clients say things like ‘I think my pension age is 67 now, but who knows!’. People often have a vague idea of when their state pension age is and have not given much thought to what they will do after retirement or what their lives will be like.
We meet clients of all ages and discuss their future and what they would like to achieve. Very often, clients do not think in advance about when they would like to retire and, crucially, how much income they will need when they retire. Clients in their 30s or 40s would greatly benefit from doing earlier planning, as this can have a significant impact and can require much less capital. More importantly, clients who do this at an earlier age may be able to retire sooner if that is what they desire. Planning earlier gives options, and importantly, builds in resiliency in case life changes unexpectedly.
A good starting point is to sit down now and write down meticulously (and honestly!) how much you are spending each month on your current lifestyle. Then have a think about what sort of lifestyle you would like when you are older and have given up work. How will things be different? Will you want more holidays or to eat out more? Are there any expenses you have now that you won’t have when you retire? Start to work towards a number, per month or year, that you will need and understand what that number is and what it represents for you in your retirement.
The next part is about actually sitting down and thinking about how you like to spend your time. Some clients state they enjoy working as it gives them a sense of purpose, and the thought of giving up can be quite daunting, whereas other clients say they would give up tomorrow if they could. These days, people rarely work right up until the day when they receive their state pension and then stop working. Many people will gradually ‘phase’ into retirement, perhaps reducing working hours over some time before leading up to full retirement. Think about what you would do if you worked less, and is this something you would like to achieve? When would you ideally like to be able to take your foot off the gas?
The next part is arguably harder. With some idea of what ‘shape’ of retirement you would like, as well as a target income amount to aim for, how do you know if you are on track to achieve it, or if it is just wishful thinking? Working with a Financial Planner can help map out your future, taking the details of any existing pension arrangements, or other investments you have, making some assumptions and then projecting forward to see if you have a shortfall or if indeed you are already on track to meet your objectives. If you are on track, then great, now is the time to think about what you need to do to stay on track or even improve your position. If you have a shortfall, then you can start to think about the things that you can control:
- Are you prepared to move your retirement goalpost and work for longer?
- Are you prepared to reduce your income target for retirement?
- Are you prepared to save and invest more of your income now in your future?
- Are you prepared to take more investment risk if you have a shortfall?
- Are you prepared to sell assets to fund your retirement goals (e.g. move to a cheaper area)?
- Is there a compromise between any of these?
Having this level of understanding about your position puts you in control. You can choose to compromise if you like. Is it more important for you to have the time away from work, or more important to have the money in retirement for those extra holidays and luxuries? Too often many clients leave these questions unanswered, and any delay can put constraints on available options.
Sounds great, so what could go wrong?
Well, hopefully nothing, but there are always things that could push you off course that should be considered. Typical client questions can include:
- When can I retire?
- Can I afford to retire?
- Will I run out of money?
- What happens if something unexpected comes up?
- What if I get sick, or my partner gets sick, and we can’t save as much as we’d like?
- What if I have some unforeseen expense that I haven’t planned for?
- Can I afford to send my children/grandchildren to private school or university?
- How can I plan for wealth transfer, and are there any inheritance tax implications?
These are only some of the things you need to certainly think about and plan for. The best retirement plan in the world means nothing without the appropriate contingency plans in place, so working with an advisor can help you cover these eventualities, keeping you on track for your future. Life can throw some twists and turns at the event the best conceived plans.
How else can a financial planner help me?
Pensions and taxes are complicated, especially as the rules can change frequently. Common questions that are asked are:
- How do I know if my pension is invested correctly?
- Is my pension growing as much as it should be?
- Are the charges on my pension competitive?
- How do I draw income from my pension?
- What about my pension tax-free lump sum? Should I draw it all in one go?
- How can I be more tax-efficient?
A good Financial Planner will work with you to answer these kinds of questions to give you confidence in your plan. Your planner should help to make sure that you take advantage of tax reliefs that are available, ensuring that you are not losing out by paying more tax than you need to, which can make a big difference over several years.
Working with a planner on an ongoing basis can help put you in the driving seat, making retirement no longer something that just happens to you when you get to a certain age, but a new stage which you are looking forward to. Financial planners can also help you challenge some of your assumptions in case they are unrealistic for the optimist or too gloomy for the pessimist.
Each of us has two personalities: a far-sighted planner and a myopic doer. As humans, the Doer in all of us want it now and instant gratification. In their best-selling book (Nudge), Richard Thaler and Cass Sunstein explain these two personalities: “The Planner is trying to promote long-term welfare but must cope with the feeling, mischief and the strong will of the Doer, which is exposed to the temptations that come with arousal. Sometimes the two parts of the brain can be in severe conflict – a kind of battle that one or the other is bound to lose.”
Perhaps one of the most important questions you must honestly ask yourself is, do you have the discipline to manage your retirement? Answering this question can have a profound impact on your retirement. Unfortunately, a common problem is that as humans, when things get difficult, we can procrastinate and do nothing. Leaving retirement too late can have profound implications, as the one thing that cannot be stopped is time. Any plan is better than no plan.
Thanks to David Medland, Chartered Financial Planner, for his contributions.
The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.
Please note that the FCA do not regulate will writing, tax planning and trusts.
FP34648 approval - Expiry 25.06.26