So, by this stage you should know whether you are likely to be able to meet your expected spend in retirement, based upon your current situation.
If you are on track to meet or exceed your target hopefully this has given you some peace of mind – although I still would recommend you revisit your plan regularly, to make sure the picture remains positive.
If you have identified a shortfall you can look to address this by one of more of the following:
- Contribute more to your pensions: even small increases add up, and the earlier you make the change the better, as the extra money you pay in is likely to benefit from compound growth. You can use the Money Advice Service’s pension calculator I mentioned last week to see the effect of increasing contributions: For more information click here.
- Retiring later: retiring young is attractive but for many this simply isn’t affordable. Moving back your target date gives you more time to save for retirement as well as there being fewer years of retirement spending to cover.
- Think about what your pension is invested in and whether this is right for you: most pensions allow you a degree of choice about the investments you hold, however typically you’ll be in a ‘default fund’ unless you’ve made your own decisions. There may also be some element of ‘de-risking’ built into your pension, meaning your pension money is moved from higher return/risk investments to lower return/risk investments as you approach your chosen retirement date. Generally speaking, when picking an investment to achieve a higher return, you normally need to take more risk with your money, which may not be right for you. You should think about your risk tolerance (how comfortable you are taking risk), your capacity (how much you could afford to lose) and your timeframe (how long you are investing for).
- Build up your other income sources & investments: for certain individuals’ pensions alone may not be enough to cover expected spend in retirement due to the rules around how much you can contribute, and for these people advice should be sought about viable alternatives. Another income stream I typically see clients build ahead of retirement is rental income, either by taking a lodger, if they have a spare room, or by renting a second property. The tax rules have changed in recent years to discourage individuals buying a second property to rent out, so this could be less prevalent in the future.
- Reduce your expenditure goal for retirement – but make sure you consider what kind of lifestyle choices this could demand.
As you may appreciate, planning is an imperfect science, involving lots of assumptions, such as investment growth rates, inflation rates, earning levels, tax rules etc. These are simply estimates, and any changes will impact your retirement plans, for better or worse. This uncertainty means you should regularly revisit your retirement plans: making small adjustments regularly as time goes on could prevent you from having to face some very stark choices at retirement.
Hopefully this article is some help to you if you are making your own retirement plans, but this is not financial advice.
If you would like advice on preparing for retirement don’t hesitate to get in touch. We use cutting edge lifetime cash-flow modelling tool to work out what the future could look like, based upon your current situation, and show you the long term impacts of making key decisions now.
For more information, please contact Tom Shorland