Many of us have ambitions to retire earlier than the State Pension age, but have you considered what you will actually do in retirement? Answering this question is essential to making it a reality.
Even for those lucky enough to enjoy their work, it’s not unusual to experience moments where you long for the day that you no longer need to work. In our younger working years, ambitions about retiring early tend to be at their most optimistic. A Goldman Sachs survey found that 25% of Gen Z workers, who only recently started working, expect to retire before age 55.
As life goes on, however, and reality catches up with you, these expectations can deplete somewhat. In a research study in which the IFS asked individuals aged between 40 and 54 when they expect to retire, the average response was 65 for men and 64 for women. Building up a retirement pot that will meet your goals requires time, sacrifice, and a robust plan.
It also requires considerable thought into what you will do in retirement and how you will live. While we all tend to like to have a retirement age in mind, far fewer people actively consider their lifestyle goals in retirement, beyond simply not working. The top reason stated in an Aviva study was the vague desire to “enjoy more freedom” while still fit enough to enjoy it.
“When I ask my clients what exactly this means, the answers tend to relate to travel, activities with grandchildren, new hobbies, and visiting places they've never had time to visit. In essence, a lifestyle that could likely be more expensive than the one they live now, but without a full-time working salary to help fund it,” says Rudy Smith, Independent Financial Adviser at Ascot Lloyd.
“Any retirement plan should start by asking about your goals. People tend to be very focused on getting to retirement but not so much on the lifestyle they want to have in retirement. Actively defining these goals is essential to understanding how much you will need to save to achieve that lifestyle, and only from there can we build a plan and set out financial targets to get there.”
Making your money work for you
Knowing how much money you will need to live on during retirement is impossible without first understanding these goals. In a recent report commissioned by the Department for Work and Pensions, only 23% of 40-75 year olds in the UK said they had a very good idea of the income they would need in retirement, so most people struggle with doing this. An Independent Financial Adviser can help, not just in building out those goals with you but translating them into the likely sum you will require for retirement and, most importantly, a plan to make it all a reality.
Ian and Linda were in a similar position to millions of others when they were approaching an age where they’d like to retire but didn’t know when they would be able to and whether they would have enough to achieve their desired lifestyle. They had some money invested but it was “messy” and they felt it was “just sitting there” rather than being made to work for them.
When Linda was urged by a colleague to attend a retirement seminar, she enjoyed a presentation from Rudy so much that she approached him for advice. In a follow-up meeting, Rudy went through all of their finances with them, including outgoings, debt, attitudes to money and, crucially, their ideal goals for retirement. Armed with this information, he built them a plan.
“We wanted something that was going to grow and we could access,” says Ian. “We know now our children can get that money rather than it being stopped as soon as we pass away. In terms of our investments, we have absolutely seen a return. The fact we see Rudy every year and can talk to him whenever we have questions, that's what we wanted out of the whole thing.”
Linda adds: “Obviously it's a business relationship but it feels like a friendship.”
Modelling your future
Ascot Lloyd has sophisticated cash flow modelling tools which calculate how much income somebody requires in retirement, and its Independent Financial Advisers have the knowledge and experience to help pots grow, but a clear picture of retirement goals must come from the person who is going to live it. Start by simply creating a list of the things important to you as you get older and your Financial Adviser will be able to build it out from there. But without laying out these simple goals, there is a danger that the life you want to live in retirement is not attainable.
When the time comes, your Independent Financial Adviser will then work with you to put in place a sustainable income plan that meets your retirement goals, taking into account your State Pension, drawdown options from any private pensions and alternative income sources.
The sooner you start planning for retirement the better, as compound interest growth is a very powerful thing which you should seek to use to your advantage. Delaying paying into a private pension for just ten years, for instance, could leave you having to pay in twice as much for the rest of your life to catch up to how much you could have saved had you started a decade earlier.
Incentives to save
You should also seek to use tax reliefs the government promotes specifically to encourage people to save for retirement. They are designed in such a way that the sooner you start planning for retirement, the more options and opportunities will be available to you. Retirement might be far from your mind in your 20s and 30s, but it’s the best time to start planning for it.
“Our role as financial advisers is to ask searching questions to find out what their goals are and then show what they need to do to achieve them,” says Rudy. “We bring that together with the allowances they may not even be aware of. Whilst giving them advice, we also show them how to effectively get discounts from the government through tax relief on investments and pensions. Often there are also pensions they've forgotten about or didn't know they had so we can find them, simplify them if needed and, often, make much more efficient use of their existing savings.
“A lot of people underestimate what they need to save to achieve their ideal retirement but some people also overestimate. One client was surprised and delighted recently when I told him he'd already saved what he needed to achieve his lifestyle goals in retirement. As soon as possible, have a conversation with your Financial Adviser to understand what retirement you want and set out how you can afford it. And then we can help you work towards achieving your goals.”
Ascot Lloyd’s Independent Financial Advisers can help you identify your lifestyle goals for retirement and create a plan to achieve them. Book a callback to start a conversation.