When you’re busy working hard to grow your wealth, provide for your family, while also finding time to enjoy life, it can be difficult to find a moment to pause and think deeply about the future.
And yet, a happy and comfortable retirement requires forethought and planning.
When you're no longer working, a clear budget giving clarity over your income and expenditure is sensible planning. This is especially true as some expenses, such as medical and health insurance, are likely to increase.
Knowing what you have coming in and going out each month can also bring peace of mind, allowing you to relax and enjoy your retirement without worrying about money.
Ultimately, you’re likely to find a significant difference in your budget when you retire. So, here are four practical steps you could take today to ensure you’re financially prepared to enjoy your hard-earned retirement.
1. Know what you’re aiming for
Whether you have grand plans to pursue lots of adventures or wish to relocate and live a quiet life close to family, it's important to work out how much you'll need to meet your retirement dreams.
If you’re not sure how you intend to spend your time in retirement, now’s the time to start plotting and planning.
Don't be afraid to dream big.
In fact, now’s the ideal time to draw up a bucket list. If you already have one, dig it out and revisit your hopes, ambitions, and desires – are they still relevant and appropriate for who you are and the values you hold today?
Once you have clear goals in mind, you should be able to calculate if your retirement lifestyle is likely to be more or less expensive than your working life.
Make sure you'll have enough to pay the bills with plenty left over to live your dreams.
When it comes to planning for bigger expenses, such as luxury travel, you may find it useful to set out a timeline of what you want to do and when. This will help you to plan ahead to cover one or multiple occasions of increased expenditure.
And don't forget to include the small, lower-cost treats and activities you expect to enjoy too. More meals out, day trips, gym or club memberships all add up, so be sure they feature in your budget.
2. Understand how much you’ll need
Each stage of retirement will require a different amount of money:
- On the go – during the early stages of retirement, there's a strong likelihood that you'll spend more on travel, hobbies, or home improvements
- Slowing down – while you may be slightly less active, you're still busy with hobbies, but you may be less inclined to long-haul travel
- Coming to a stop – in later life, your mobility may be more limited, and you may require care.
Start by planning your essential household expenditure. This may turn out to vary significantly from what goes out of your account at the moment, while you’re busy working and supporting your family.
For example, in the years leading up to your retirement, your children may leave home and start on their own career path, and you may pay off your mortgage. As a result, you may suddenly find that your outgoings are significantly lower than they have been in many years.
If you’re also paying to cover the costs of a commute, you may make savings when you no longer need to travel for work.
That said, you may of course replace your work commute with travel to enjoy hobbies or longer vacations, including weekend trips and maybe more visits to spend quality time with family or friends.
These could end up costing more than your previous daily commute.
Take time to consider how your household bills might alter when you retire. You may intend to spend a lot more time at home – requiring frequent and continuous use of the AC, for example – which may result in higher utility bills.
3. Review what you already have
While you may consider your pension as the foundation of your retirement plan, if you have other income, it may be prudent to delay drawing on your pension. Because pension funds benefit from tax-free growth, leaving your pension invested is especially useful for maintaining capital value.
Indeed, throughout your retirement, you may find that you use a variety of assets or sources of income at different times to suit your needs.
As well as your pension, other assets that you may have accrued ready to fund your ideal retirement could include:
- Income from property – rental income or cash from a sale of your home, if you downsize
- Social security – the UK State Pension, or similar
- Savings and investments.
Cashflow modelling can help you to see if your savings are sufficient to support you throughout your life. Your financial planner can input data such as your current assets and savings, key event dates such as your expected retirement date, and any financial commitments you have now, or in the future.
To forecast your future income, the software makes assumptions about the expected returns on investments, and how inflation might change things.
By regularly reviewing your cashflow model, you will understand how much income you are likely to need. Then, your planner can help you decide on your best options for how and when to access your pension and other investments and savings.
4. Set a retirement date so you know how long you have to make up any shortfall
With a clearer idea of how your retirement may look, it’s time to think about when you’d like to embark on your next chapter.
Cashflow planning can be helpful here too, as it can alert you of any potential shortfall in your projected retirement income.
This may enable you to reevaluate and calculate how much longer you may need to work to accrue the level of wealth required to allow you to retire. It could also provide valuable reassurance that you have enough money to deliver a sustainable long-term income throughout your retirement.
Alternatively, you may discover that you already have all the funds you need to retire comfortably – allowing you to accelerate and set a retirement date earlier than you might have expected.
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