How to plan for a more comfortable retirement
Close your eyes and imagine that you are retiring tomorrow. What does it look like? Playing more golf? Watching the sun go down while lying on a tropical beach? Spending more time with the grandkids?
Now open your eyes and take a look at your last pension statement because, if recent research is anything to go by, people underestimate how much they need in retirement by around 50% on average.
The general maxim of starting to save for retirement as early as possible has never been truer.
So where to start? Well, I use a (possibly overused) phrase with my clients:
Failing to plan is planning to fail…
You need to know what you want and when you need it. If you are happy to work until your late sixties, and live on the equivalent of £7,582 per year, you can rely on the state pension if you have paid your NI contributions over the years. This will not buy you much in the way of world cruises, nor is it designed to – it’ll provide for your survival, and that’s about it.
The good news is that most of us have some form of pension provision in place. The even better news is that, with the introduction of auto enrolment in the last couple of years, more people are contributing to pensions than ever before.
However, when clients first come to see me, they tend not to have a realistic idea of what their pension contributions need to be to achieve the retirement they desire. Most people I see only start thinking seriously about their retirement in their early to mid-forties and, as someone who finds themselves in that particular age group, I can definitely relate.
The very first thing we do with our clients is to look at where they are starting from, and assess their existing provision. We then have a detailed discussion about what they want to achieve from this day forward until the day they meet their maker. This includes non-financial achievements as well, as this gives a more rounded idea of what is important to the client.
We then look at existing outgoings and discount anything that will not be relevant during retirement (things like mortgages, costs associated with raising a child (such as university), and the cost of commuting and other expenses associated with employment – have you see the price of suits recently?!).
We then add in any costs that the client will likely end up paying once in retirement, and this enables us to develop a ballpark figure for how much they will need to have in place to achieve their objectives. This figure then allows us to build the framework for an ongoing plan.
As an IFA practice we have invested a lot of time and money into systems that allow us to demonstrate to the client how realistic their plan is. By using this ‘lifetime cash flow modelling’ we can tweak the assumptions it uses to show outcomes for different scenarios. It is not uncommon for a client’s original plan to show that they could run out of money far sooner in retirement than they expected.
This is where an IFA can weave some magic. In conjunction with the client, we can use the time available to adjust their plan in a way that, hopefully, results in a happy compromise. In a situation where a client may not be able to achieve their objectives, we have a few options:
- INCREASE CONTRIBUTIONS. This may seem obvious, but if affordable, increasing contributions might be all that is required the bridge the gap. The state will add at least 20% onto every personal pension contribution you make, so these extra payments may not be as much as initially anticipated.
- RETIRE LATER. By putting retirement plans back a few years, you are ensuring that you will spend less time relying on pension income, while also paying more into a pension pot. The question is, can you put up with your boss for a few more years?
- TAKE MORE RISK. By taking more risk you could achieve higher returns, and therefore your pension could be worth more when you need it. However, given the greater risk and volatility, achieving returns is not a guarantee. Many people are not in a position to accept a potential loss, and equally may not find it possible to replenish their funds should they lose money. This can be a VERY dangerous thing to do, especially if you only have a few years left before you retire.
In reality, clients tend to do a bit of each when there is a disparity between what they want and what they are likely to get. By increasing contributions, putting retirement back a few years and investing appropriately in risk, many people could significantly improve the health of their pension.
Once the initial plan is up and running, and everyone has a clear idea of where they are heading, it needs to be reviewed on a regular basis. As the client’s life alters (for better or worse) the plan will need to be modified to adapt to these changes. Regular reviews mean potential problems can be identified and addressed before they become a serious issue.
If you do not want to lead a ‘baked beans’ retirement then start planning as soon as possible, and subsequently review those plans regularly. A good IFA will work with you to maximise your plan, making sure you pay as little tax as possible and ensuring you invest with the right amount of risk for you.
As an adviser with the best part of 20 years’ experience, there is nothing better than seeing a retirement plan for a client coming together.