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Planning Retirement Online

 

Guide to Planning Retirement Finances

 

Introduction

Retirement PlanningOne of the most important things that we can do as we progress through our working life is to plan for our retirement. Many of us will live well into our 80’s, 90’s and even100’s and, unless we want to work until we drop, we need to plan for our retirement. Planning involves thinking about both finance and the lifestyle that we want to lead in our retirement. The two are linked because unless we have an idea of what we want to do, we won’t know how much money we will need to fund it.

This section of our Retirement Planning Guide focuses on the financial side of planning for retirement but remember that it is inextricably linked with what you plan to do in retirement and how you want to live.

 

How long a retirement do we want?

Retirement has changed considerably with each passing generation. Those retiring now can expect 25 years or more of retirement and typically a much more healthy and active one than their parents would have had.

In the coming years the whole nature of retirement is likely to change due to both further increases in longevity and because of increased pressure on finances, in particular through the closure of many employers’ Final Salary schemes and replacement with Defined Contribution schemes. The removal of the default retirement age back in 2011 means that we can no longer be forced to retire, so we can in theory work for longer if we want to. However, few of us want to work until we drop, so we do need to think about how long we hope to spend in retirement and plan accordingly.

One thing that we expect to see over time, because of increasing longevity, finance pressures and employer action, is more phased retirement where we gradually cut down the number of days a week we work. From surveys we have done at LaterLife most people would be happy to trade this ability to gradually cut down in return for working longer and indeed it can be much more enjoyable than going from working full time to stopping completely.

However, in terms of planning, it is easiest to have in mind a target age for full retirement and then closer to the time decide whether we want to phase it. Traditionally, most people plan around either the State Pension Age (currently changing to 66 but likely to rise over time in line with increasing longevity) or the ‘Normal Retirement Date’ of their company pension scheme.

The one benefit of increasing longevity, if we think in terms of say 25 years of retirement, is that there is a longer period of working to save for those 25 years.

 

How much money do we need in retirement?

How much money we need in retirement will depend very much on what sort of lifestyle we envisage for ourselves in retirement. Our day to day living expenses will hopefully go down e.g. mortgage paid off, kids off our hands, no travel costs to work etc. However, if we plan to take that trip of a lifetime, or have expensive hobbies we want to pursue then we need to allow for that.

Traditionally, many Final Salary Schemes (in which we get a pension related to our salary and the number of years we have been in the scheme) were planned on the basis of achieving a pension of 2/3 of final salary if full contributions had been made over 40 years. So this may be a benchmark you want to use. Alternatively you might want to think in terms of a specific target salary based on what that would buy today and then adjust that for inflation over the intervening years.

Also take into account that most schemes allow 25% of the pension fund built up to be taken as a tax free lump sum. This can be useful for providing for major purchases on retirement e.g. a new car, paying off the mortgage, that trip of a lifetime etc. However, that reduces the overall pension you might otherwise get, so needs to be considered carefully when the time comes (see our Guide to Lump Sums).

CONTINUE TO: Sources of Retirement Income

NEXT STEPS

The rest of the Guide covers the other aspects of planning your retirement finances. We suggest you read through the whole guide to gain a general understanding and then work through the appropriate sections to develop your personal ideas.

If you've done your initial retirement planning then use our checklist: on a regular basis:
Reviewing Projected Retirement income - Checklist

 

However if you feel that you need some help from a financial advisor, then visit our section on obtaining financial advice, or our page on Laterlife selected services and associated advice.

 
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