What factors do you need to consider when planning for retirement?

When you’re thinking about retirement, it can seem like there are multiple elements to juggle.  But balancing them is important for ensuring your savings support you for the rest of your life and you have the freedom to enjoy your retirement years.

Securing the retirement you want starts with careful planning.  Whether you are years away from retiring and have just started paying into a Workplace Pension or hoping to take an income from your pension soon, planning means you can make necessary adjustments and align your expectations with what is achievable.

Despite financial planning for your later years being critical, it’s an area that many aren’t engaging with or are vastly underestimating the figure they need to comfortably retire.  As life expectancy rises, it is not unusual to enjoy 30 or even 40 years in retirement, so the money you are putting to one side needs to last a significant amount of time.

Research from Sanlam has shown just how many people could be facing an unexpected shortfall when they decide to give up work.  More than two in five workers under the age of 45 risk not having enough after estimating a pension fund of £100,000 will be sufficient.  It is a fund that would generate an annual guaranteed income, if they were to buy an annuity, of around £5,400, assuming the individual is 65 and single, dependent on the annuity rate accessed.

Even when you factor in the new State Pension of £164.32 per week (£8,546 per annum) if you are eligible, it is likely workers will be facing a gap unless they actively plan their retirement.

The research also found that among under-45s:

  • 34% do not think they will be able to meet their pension fund goals
  • 33% have less than £10,000 saved for retirement
  • 24% don not know the value of their pension
  • Around a third are relying on an inheritance to help fund retirement

But more worrying is the fact the survey discovered that among those aged 55 and over, one fifth don not currently have any savings in their pension.  A further 22% don not know the value of their Workplace Pension.

The amount you need for retirement will vary depending on your aspirations and lifestyle.  However, Which? estimates that retired couples need £18,000 per year to cover household basics alone.  This increases to £26,000 when some luxuries, such as European holidays, hobbies, and eating out, are included.  If you want to include more luxuries, such as long-haul trips or a new car, you can expect the figure to rise further still to £39,000.

If you want to retire and enjoy a lifestyle where you can indulge in more luxuries, you will need to build up around £780,000 as a couple before retiring, based on an optimistic annuity of £5,000 per £100,000.  Even if you deduct the full State Pension, which would give an income that is roughly similar to a fund of £170,800 at the rate above, you will still need to bridge the gap.

With this in mind, retirement planning is essential to maximise the money you are saving.  For example, saving into a Workplace Pension means you will benefit from employer contributions and tax relief, effectively topping up your contributions with ‘free money’.  The earlier you start retirement planning, the far more likely you are to secure the retirement you are looking forward to.

If you are approaching retirement age or simply want to calculate the lifestyle you will be able to afford with your current pension plan, you will need to factor in these six areas:

1. Life expectancy: As we’ve already mentioned, life expectancy is on the increase. That means the average person aged 65 today can expect to spend around 20 years in retirement, according to figures from the Office of National Statistics.  For younger generations, you’ll need to factor in funding an even longer period of retirement, which will lead to annuity rates decreasing further.

2. Average monthly outgoings: As you approach retirement, most people find that their outgoings have decreased, if you’ve paid off the mortgage for example. However, this will depend on your personal situation and the steps you take before retiring.  Understanding this figure will give you a baseline of the income you want your pension fund to generate.

3. Rising cost of living: It’s important the income you receive in retirement, from any source, keeps pace with the cost of living. If it doesn’t, because the income is fixed or doesn’t rise with inflation, the long-term value of your income will fall in real terms, along with your buying power.

4. One-off outgoings: If you’re approaching retirement and have plans to make significant one-off payments, such as travelling or paying off the remainder of your mortgage, you need to understand how doing so will affect your level of income throughout retirement. In other words, withdrawing a lump sum means that money can no longer be used to generate an income.

5. Cost of care: As life expectancy rises, more of us are going to need some level of care in our later years. If you need to pay for care, it is important to understand the total amount you expect to pay over the years.  This should be factored into your retirement plan, ensuring you have sufficient funds to pay for it when the time comes.

6. Legacy: Many people want to leave their loved ones with a legacy. If what you leave behind is important to you, it should form part of your financial plan.  The inheritance you want to leave for family or friends will impact your income throughout your retirement years.

For a better understanding of how these factors will affect your pension fund and the level of income you can expect in retirement, please contact us today.

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.

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