I know it’s only March, but have you started organising your work Christmas party yet? Chances are the answer to that question is ‘no’. It’s months away, right?
Right now, all you know is that there will be a Christmas do of some description. As it comes closer, however, you need to start working on the detail. Where will you go? How many people is it for? What’s the budget?
Then, as it gets even nearer, you have to start thinking about granular detail like: who will sit where? Who needs a taxi to the event? And are you having the Christmas pudding or the cheesecake?
In many ways, planning your retirement is the same. You might be at the ‘it’s going to happen’ stage or the ‘having your dinner suit dry cleaned’ stage. Either way, the nearer it gets, the more detailed a plan you need.
So, as your retirement gets closer, here are four steps you should take.
1. Start making formal plans
Irrespective of how you manage your finances, it’s time to start writing things down. Even if you’re not retiring for a few years, start to work out exactly how much income you’ll need when you stop working.
Your household expenditure is unlikely to change much, so that’s an easy place to start. Then think about the luxuries you want – how often are you going to change your car? What holidays have you planned?
The aim of this process is to establish a likely required and desired lifestyle cost for the early years of your retirement.
It’s important that you do this as accurately as you can. Don’t round up your expenditure to the nearest £5,000 a year – it should be nearer £500 if you can.
2. Establish where your income is coming from
Now you have worked out what level of income you need, it’s time to establish what income you have already secured.
- State Pension – Obtain a State Pension forecast for you and your partner
- Current pensions – Look at your most recent annual statements
- Previous company pensions – Dig out the paperwork from any old company pensions and make sure you have a recent forecast. This may take some work. If you have had several jobs then it may take some time to track down all the old pensions you have, but it is worth the effort. The government pensions tracing service can help
- Any other pensions – Examples include widow’s pensions or deferred annuities
3. Work out what the shortfall is
Once you know what your retirement expenditure will be, and what your income is forecast to be, it’s easy to work out the difference between the two. This is the shortfall you have to make up in the time you have remaining.
Don’t forget that that you need to consider the point where this difference is greatest. For example, if you’re planning to retire at 60, then you’ll have to wait a few more years before your State Pension kicks in. In the meantime, you’ll need to fund your lifestyle from other sources.
In general terms your biggest shortfall is likely to be in the first few years. Why?
- Pensions are likely to begin at different times. As above, your State Pension might begin after your various company pensions kick in at different ages
- Your expenditure in the early years is likely to be greater. If you’re in good health and you want to enjoy yourself while you are able, you could potentially spend more in this period than you will in later life.
Building a timeline of income can help. What income is coming, and when? For example, you may continue to work part-time in the early years of your retirement, providing you with the income you need until your State Pension begins.
4. Work out your goal
When you know what the shortfall is (at its biggest point) you can start to work out an exact number that you’ll need to save in your remaining working years.
Bear in mind that you have to multiple this annual shortfall by the number of years you anticipate being alive after you retire.
The average life expectancy for a 65-year-old man in the UK is just over 18 years, while for a woman it’s 21 years. So, make sure you multiply your annual shortfall by 20, 25 or even more to ensure you have enough in later life.
You may also have to take inflation into account and consider that you might need more in real terms than you need now.
A target figure
Booking your Christmas party in March – right down to every last detail – means you have much less to worry about. You also know exactly how much it is going to cost, and you have plenty of time left to reach this financial target.
You should be in the same place with your pension. If you know where you need to be, and you have plenty of time to reach your target, getting there should be easier.
If you want to have a chat about your financial plan or you’d like advice in meeting your goals, please give me a call on 07769 156 250.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.