Everyone wants to have a care-free retirement, but the sizzle is often much louder than the steak. With financial planners switching gears to offer retirement planning advice to older generations, you’d think you would have nothing to worry about.
But you do.
Not all financial planners have the experience necessary to make income-based financial plans, which is what you need during retirement.
Even when they do have the experience, no one will care as much about your money as you. So, here’s how to research and prepare for the future so that your retirement years really are your golden years.
Decide When You Want To Retire
This is a highly personal decision. Some people want to retire at 65, while others are OK waiting until 70 or even 75. If you know you want to call it quits at age 65, then you’ll have to plan accordingly. Save more money now, so that it can accumulate to an amount which will sustain you for the rest of your life.
Keep in mind that the earlier you retire, the longer your savings have to sustain you. Most people find it difficult to live 30 years in retirement without at least some financial help. Unless you’ve accumulated a massive amount of money during your working years, err on the side of a shorter retirement (i.e. plan to work longer).
The “Secret” Formula For Knowing How Much You Need For Retirement
In order to have enough money saved, you’ll want to save a substantial amount of your pre-retirement income. And, while there are a lot of different formulas to figure this out, most of them are complex. A simple way to calculate how much you need is to take your monthly spending, and then subtract your future expected monthly pension or benefit payments, and then multiply the resulting figure by 200.
This is the total amount of savings you’ll need for your future.
So, in practice, it might look like this:
- Monthly expenses: £2,000
- Future monthly benefit payment: £1,500
- Shortfall: £500 x 200 = £100,000
So, the amount you’d have to save would be £100,000.
If you want to give yourself a “cushion” for unexpected expenses during retirement, add 20% to this final figure.
Start Preparing For Downsizing
Now is the time to start thinking about downsizing. If you live in a large home, it might be a no-brainer that you’ll need to downsize. But, how? Start by checking out Hetheringtons. If you like the square meters you have now, maybe all you really need to do is find a home in a different part of town that’s cheaper per square meter.
If you really don’t need the size you have now, then you can probably get away with a smaller home.
For many, it’s hard to give up a home they’ve lived in for so long, put so much money into, and have fond memories of. If you raised your family in a particular home, letting go can be really tough.
Yet, if you can’t afford the place you’re living, or it’s getting way too difficult to take care of, it’s the best option.
Plan at least a few years out. Put your home on the market a year before you retire, so you have sufficient time to find a new place, get moved in, and settled down.
Some people wait until after they retire, thinking that this is a good time to sell the home. But, if your financial position is tight right now, it’s actually a bad idea to wait until your income is fixed and you have less ability to do something about it.
Get a Pension Forecast
Don’t wait until the last minute to get a pension quote on what your monthly income will be. Do it now. It’s as easy as contacting your pension administrator. Every year, you’re sent a pension statement that details how much you should expect to receive in monthly benefit payments.
This will help you plan out your own personal savings and clue you in to how much more you’ll need to save on your own.
Deciding On A Tax-Free Lump Sum Amount
You can take pension payments or a partial lump sum as a tax-free lump sum amount. If you opt for the lump sum amount, it’s usually 25% of the total pension pot or your remaining lifetime allowance. The remainder is paid as usual.
Taking Out An Annuity
With your lump sum amount, consider buying an annuity. An annuity guarantees your income for life, which can be a nice addition to the rest of your income. Or, you can simply hold onto the lump sum just in case you need it for a one-time expense.
Ben Nicholls is a financial consultant who works within the pensions department. Look out for his articles on personal finance websites offering up helpful advice for baby boomers.