The worldwide pandemic has prompted people to re-evaluate how they spend their time; it’s really highlighted what is important to them. In a recent survey we asked you how many of you were considering changing your retirement plans as a result of the pandemic and nearly 30% of you who responded said you are. You also told us that top of your mind was investment performance and nearly 40% of you who responded also said you were needing to think about helping family or friends.
Our clients often come to us looking for reassurance that they have a retirement plan which will maintain their lifestyle and independence through their retirement years. As financial advisers it’s our role to help you work out how much you will need, how much you will have and, if there is a shortfall, how to make up the difference between now and your retirement days. And of course, things may change over time, so regular review can make sure you stay one step ahead and keep your plan on track, even in a pandemic.
In the below article Jason Barefoot, Chartered Financial Planner at Ascot Lloyd, shares some of his key tips about retirement planning and an example of a client situation which shows the added value a financial adviser can bring to your retirement plans.
Understanding how much money you will need
In our experience, many people drastically underestimate how much they will need to live on, while overestimating how much their pension pot will pay each year. To create a realistic retirement plan, you will need a good handle on how much you are likely to spend once you stop working.
Thinking about basic living expenses, no doubt some of your everyday expenditure will change or decrease when you retire. For example, it is likely you will have paid off your mortgage, you won’t have to pay to commute to work, and you will no longer be raising children, and if you buy a sandwich and coffee every day at work, that’s another expense you can cross off your list. However, you will still have plenty of everyday living expenses. Have a think about what you paid for last month which you will continue with after retirement. This will help you work out your monthly and yearly expenses.
Take into account the following:
- food shopping for the week / month
- council rates
- utility bills
- subscriptions to internet or streaming TV services, gin clubs, golf memberships, mobile phone cost etc.
You also need to factor in any big-ticket items you may want like luxury holidays, a child’s wedding, a deposit for their first house or perhaps a new car.
You now know how much this will cost if you retired today. When projecting this forward to your retirement age you need to take into account inflation. By using a simple online ‘Time Value for money’ calculator, it will enable you to determine how much your current lifestyle may cost at that point. This provides the bedrock for planning purposes. For example, £20,000 today would be £24,380 in 10 years’ time at 2% inflation.
Retirement income comes from many pots. So, you will also need to work out where you will be getting money from during your retirement years, for example a state pension, occupation pension, ISA savings, investment portfolio, rent from a let property. Then by understanding what your workplace pensions and investments will grow to by your retirement age will enable you to convert these into an income source.
Here is an example of a typical calculation.
If your annual expenses are expected to be £24k at retirement (i.e. this has built in the 2% inflation from when you started planning) and your annual income is expected to be £12k at retirement, that leaves you with an annual shortfall of £12k. You would then multiply this by 25 years as a typical planning rule for the duration of retirement years, leaving an additional retirement pot requirement of £300k. So, to plan ahead you would need to start to look at how much you contribute now to bridge the gap ready for your retirement.
Giving my client the luxury of breathing space
The pandemic has touched many peoples’ lives and for one of my clients who was heading towards retirement after many years working in a niche industry and highly qualified and experienced, suddenly found himself redundant with few opportunities for alternative employment. My client felt the pressure of uncertainty and the stress of an immediate shortfall in income.
Together we worked out his essential monthly expenditure, the resources he could access and by working through his day-to-day living expense requirements and looking at different scenarios, we worked out a plan that gave him 12 months breathing space to find a new job, with the least impact on his financial stability and expectations through retirement. Ultimately, my client’s diligence over the years to save and invest has put him in this position. By removing that immediate stress, he was actually fortunate enough to be able to focus on finding more employment and the right role for his experience, giving him job satisfaction, despite his nearing retirement age.
Helping you plan the retirement you deserve
At Ascot Lloyd, we are here to help you work through all the things you need to consider, and help you steer your pension strategy accordingly. If you would like to find out more about any of the areas outlined above or are interested in receiving some advice, please don’t hesitate to contact your financial adviser.