Retirement is one of the biggest steps we take. It’s perfectly normal to be apprehensive but, with some sensible planning, it’s possible to take the emotion out of your retirement finances, enabling you to focus on the life you want to lead.
If you’re about five years from retirement, you’re in good company
According to research done by The Motley Fool, most people retire at around age 65 these days – and, according to the Office for National Statistics (ONS), about 6% of the population currently have five years or less to go. It’s an unusually large cohort, as the last of the baby boomers are replaced with the first of Generation X.
But if you haven’t yet made any concrete plans, you’re also not alone. The Money & Pensions Service research says around two in three people approaching retirement have either done no or very little planning for it.
Whatever your age, whatever your expectations, there’s no reason to fear retirement. After all, it’s supposed to be fun, isn’t it?
Here are five things you may wish to think about if you’re around five years away from retiring.
What will your life look like?
The best starting point is to set money things aside, just for a moment, and reflect on what you want retirement to look like.
Most people tend to think of bigger things: travel, holiday homes, lump sums, and so on. These are of course important.
But so is the smaller stuff. In other words, what will you do all day? The ONS says that if you’re 65, average further life expectancy is 22 years for women and just under 20 years for men. That’s a lot of time to fill. Perhaps you’ll continue working – or join the UK’s 3.2m retiree volunteers revealed by the Centre for Economic Business Research – or maybe even find time for both.
Have a think, because the clearer your view of the lifestyle you want, the easier it is to plan financially.
Then comes the money
The next step is to think about all the assets you have right now – from pension pots and ISAs to property/EIS and even wine collections. Then add in money you might expect to earn between now and retirement. And finally think about what any post-retirement income might look like, including your state pension.
These are the pots that can fund your chosen lifestyle.
If there are any mismatches between lifestyle expectations and financial capability, then you want to spot them now, when you can do something about it.
Only last week I had conversations about this with two separate clients. Both had something in the region of a £1m portfolio – but drastically differing possible futures: one may struggle to fund a lifestyle rich in travel and experience, so we talked about pushing the retirement date into the future, and the other has more homely horizons and is very much on track.
If you work with an expert, life First Wealth, we’ll use a sophisticated cashflow modelling system, to get these projections correct, down to the last pound.
The main thing to remember, as with the first of the two clients above, is that there are plenty of levers you can pull: changing the retirement date, altering your expectations, seeking additional sources of income, etcetera. There are always options.
Drawing down your pension
You can do an awful lot more with your pension than you could a few years ago. Once, you had to buy an annuity. Now you can do what you like with it – within reason because some pension companies offer more flexibility than others.
So we always encourage people to speak to their pension provider – ask them what their options are. They’re busy, so be prepared to spend hours on hold. (We do this for our clients, mindful they probably have better things to do!)
Once you know, you can add this into your plans. For example, did you know that, in some circumstances, you can draw down from your pension tax free, and use the money to pay income or capital gains tax?
There are several options like this. And if you can achieve a holistic appreciation of your assets, income and liabilities you’ll have a better appreciation of the opportunities – and a better view of possible future tax bills.
Think twice about de-risking
Again, it was once normal to de-risk your investments. In other words, sell your riskier shares and buy supposedly safer bonds and cash instead.
But, today, that may not always be the best option.
For example, many of our clients find they’re happy to retain a good proportion of assets in shares and other higher returning assets, simply because they need to match inflation. With the ONS stating that consumer prices are rising at 6.8% and the FTSE100 paying a dividend yield of just 3.78% some people need all the help they can get.
It’ll just depend on what you want to achieve.
After you’ve gone
If you have a will, you’ve done well. Canada Life research found that around one in three UK adults don’t.
It should probably go without saying that it’s preferable to organise your affairs and your estate, to ensure you support the people, institutions, and causes you want to support, rather than leaving it to those who survive you.
As is arranging a lasting power of attorney. This ensures your affairs can be arranged by someone trustworthy should you be incapacitated.
Getting these done before you retire is a very sensible thing to do.
And that’s the point. While individual circumstances will always differ, a strong and flexible plan empowers you to dial down any fears about retirement and dial up your hopes.
In other words, some hard work now can improve your chances of having funds in retirement.
This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.