For many people, the Covid pandemic has strained working situations, brought unexpected redundancies and has changed expectations for the future. For those approaching retirement in this situation, the question they are asking is: do I have enough money saved to be able to stop working and retire now?
How much money do I need in retirement?
How much money you need to have saved in order to retire is based on individual needs and expectations.
Some people approach retirement in a very methodical way. Their home mortgage is paid oﬀ, they have no debts and they have accumulated savings and investments in addition to their pensions. With low bill commitments, it can be very straightforward to provide an estimate of how much income is needed to maintain a desired lifestyle.
For others, making this calculation can be more complicated. It is not uncommon for monies intended to provide for retirement to be divided across a number of assets which can include properties or businesses. This can make drawing a regular income more complicated and can also mean that there are outstanding debts and financial responsibilities to consider.
Family life can also mean entering retirement with unexpected outgoings, such as the guardianship of young children or the responsibility of care for an elderly relative. All of these can provide a very diﬀerent outlook for the future and come with diﬀerent monetary pressures and timelines.
Whilst it is very hard to give a general guide as to how much money you need, the consumer champion Which? has tried to provide these general figures. In April 2020 they spoke to 6,300 retired and semi-retired couples and asked to find out their spending habits and to help people figure out just how much they needed to save. Their survey showed that the average retirees spent around £2,100 a month, or around £25,000 a year per household in retirement. Their report showed that individuals who enjoy a luxurious retirement spend £30,000 a year, whilst those enjoying a comfortable retirement spent around £19,000 a year.
How can I find out how much income my savings will provide?
In order to put a figure on how much income you need, you need to establish a balance sheet which lists your assets and income, as well as a timeline for outstanding debts and financial commitments.
The first step is to get a combined valuation of the money you have saved into pension and other savings accounts. You may have lots of diﬀerent pension plans all with diﬀerent amounts, and this is common if you have worked for many diﬀerent employers over the years. You should also look at other assets that provide you with an income, with an outline of dates and values if you intend to sell those assets at some point in the future.
You may also be eligible for the new State pension once you reach retirement age, which is currently 66 for both men and women. The new State pension replaces the old basic State pension and the Additional State Pension. The government provide a sizable amount of income, and the amount you get paid depends on your National Insurance Record. The full level of new state pension in 2019/20 (for people qualifying for it on or after 6 April 2016) is currently £175.20 per week. This amount assumes you have made full national insurance contributions for 35 years. You can get a personal state pension forecast by visiting www.gov.uk/check-state-pension.
By combining your State pension with your pension savings and other income generating assets, a financial advisor can then provide you with an estimate of what your income will be at retirement.
Traditionally people retire between the ages of 60 and 65. But the current health crisis means more people are considering their options from the age of 55. If you are planning on being a young retiree there can be tax implications. If you are saving into a defined contribution pension, you can generally access your pension money at age 55. At this point you will be able to withdraw up to 25% of your pension tax-free. Some schemes will however have a normal or selected retirement age, and if you access your pension plan before this you may incur an early penalty charge. The one exception is if you fall seriously ill, in which case your pension provider will be able to talk to you about how this works and whether you are eligible to access funds early without penalty.
How do I turn my pension savings into a retirement income?
How your pension savings are turned into a retirement income is a process typically tailored to your individual needs, and this is best explored with an independent financial adviser. It is also a good time to consider the needs of your partner at this point. If they will be reliant on your income in retirement then you may want to ensure they continue to be paid after you die, and this needs to be incorporated into your plans.
What happens when you approach your chosen retirement age is that the companies you have saved into a pension with will write to you with a general annuity oﬀer from them. An annuity is a guaranteed income for the rest of your life, and how much income you receive in exchange for your saved lump sum depends on your health and your life expectancy. You don’t have to buy an annuity: there are alternatives ways and structures to take your retirement income that you should consider. But if you decide that this is the right choice for you, then it’s really important to shop around to find the best deal. Just like any other expensive item you buy, an annuity is no diﬀerent, and you want to make sure you are getting the highest possible income in return for your saved pension pot. A financial adviser has access to all of the annuity providers and can help you to secure the best deal by using the annuity ‘open market option’.
An annuity is the traditional way for many people to take their retirement income, but it doesn’t suit everyone. There are alternatives products which allow you to keep hold of your pension savings by investing the money and ‘drawing down’ an income from it. Unlike with an annuity, on death the remaining money in a drawdown fund is left to beneficiaries. Taking a drawdown approach comes with the risk of stock market volatility, which can mean the fund can rise or fall in value, and it has to be carefully managed to ensure the money lasts throughout retirement. Unlike an annuity, you can change a drawdown structure if you wish, giving you the option to buy an annuity later if you prefer.
If you have other assets, like property or a business, your adviser can help you consider those commitments and factor in the income or disposal of the asset into your plans.
How you draw an income in retirement can be fluid. Some people choose a combination of drawdown and annuity incomes, and this can also be complimented with other money such as rental income. What is important is that you take independent financial advice before you make any decisions regarding moving or drawing an income from your pension savings. Some decisions you make can not be changed at a later date, so it is important to get it right.
Phasing in retirement with part time work
Covid is one of many reasons why people may want to retire early. However, ending work abruptly can have serious financial implications on your wealth in retirement. Fewer years paying into a pension savings plan, and savings having to pay out for a longer retirement equates to a smaller annual income. A phased approach to retirement can oﬀer a solution, with a combination of part time working hours and a smaller pension income leading towards eventual full retirement.
A phased approach can oﬀer a good solution for those who have more complicated financial aﬀairs, especially if they require time, such as selling a business, in order to fully fund retirement.
The next steps
Most people have lots of questions at every stage of preparing for retirement, and this is where a good financial adviser can help. The journey from being dependent on a job for income to becoming financially independent in retirement is complex. Your adviser will be able to provide you with comprehensive information about the structure of your existing pension savings and your overall wealth. They will also enable you to make informed decisions about how to turn your savings into an income in a tax eﬃcient way. They handle the paperwork for you, and work under the framework of being an authorised and regulated financial adviser.
To speak to one of our independent financial advisers about retirement, call Furnley House on 0116 269 6311 or email firstname.lastname@example.org. Preparation is important when is comes to successful retirement planning and we often work with clients several years before their chosen retirement date. Your first initial meeting is without charge.
Past performance is not a reliable indicator of future performance.
The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
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