Life has suddenly become a lot more expensive hasn't it?
Inflation has been rampant over the last few years, and because of this, the cost of daily living has gone up significantly.
If you're approaching retirement, or if it's a little further away, but you can see it just over the hill, then it's essential you have some idea of how much income you'll need to enable you to enjoy this next chapter of life.
I know from experience helping clients through this, that if done right, it can be incredibly fulfilling, and you won't look back on the other side.
In planning for retirement, you need to understand how much your version of a comfortable retirement is going to cost.
We've got the latest research figures, and we'll help fill in the blanks of how you can get there.
Latest research findings - 'Comfortable Retirement'
A few days ago, the BBC News website published findings from the Pensions and Lifetimes Savings Association (PLSA).
The headline was that a single person will need £31,300 a year for a 'moderate retirement'.
For a couple, this increases to £43,100 a year.
A client of mine, who is already retired, and very comfortable with his and his wife's income/expenditure picture, was concerned by this and asked me about it. If he's concerned and he is already fine, I'm sure many more out there who are not yet retired are concerned!
The 'moderate retirement' figures has risen significantly due to two factors:
Inflation.
The expectation for retirees to help with costs for their grandchildren.
How much a year?!
The first thing to say is: don't fret. These kinds of research figures by their nature cover the whole population, and with it, the different kinds of lifestyles we all lead.
It doesn't factor in our personal circumstances, such as how much we spend now, whether anyone depends on us or not, whether we own our homes outright etc.
The figures from this type of research is really designed to guide, but the findings are not personalised to you!
If you currently spend more than the amounts outlined each year, you'll likely need more than that in retirement. The truth is none of us wants to change our lifestyles drastically, unless we can help it.
We become accustomed to our creature comforts, and often these creature comforts cost the most!
If you currently spend less than the amounts outlined, then there should less cause for concern.
If you already know, or take the time to learn, just how much you typically spend each year, you'll put yourself ahead in your planning.
Action - If you don't already know how much you spend a year, find out. It will be an illuminating exercise!
Where to start?
The likelihood is that some of this income will be covered in retirement, you probably just don't realise it.
State Pension
Everyone is entitled to a State Pension if they have paid National Insurance for 10 years, or in old parlance; 'paid their stamp'.
To get a full State Pension, you need 35 years of National Insurance contributions.
The full State Pension provides £10,600 a year now, rising to £11,533 from April this year. This is because it is guaranteed to rise due to the Triple Lock.
That Full State Pension will get you around 1/3 of the way there to a 'moderate retirement', and for a couple each with one, you'll be roughly halfway there.
Defined Benefit Pensions
If you're over 45, there is a reasonable chance you'll have a Defined Benefit (DB) pension.
In essence, these will pay out a guaranteed and inflation-linked income in retirement.
This will act in much the same way as a State Pension. You do not need to decide how it is invested, it will just pay out a guaranteed income at a set age, based on your years of service at an employer.
If you have one, think of it as a further bed-rock of guaranteed pension to rely on, to cover the essentials, on top of your State Pension.
It may also provide a tax-free lump sum at the scheme retirement age.
Personal Pensions/Workplace Pensions
These types of pensions are different, and are often referred to as 'Defined Contribution' pensions. With this type of pension, the onus is on you to decide how much to contribute and how the pension is invested.
In retirement, you'll have the option to take 25% of the pot tax-free, either as regular income or a lump sum. Often, people think you have to take it as a lump sum, but the reality is that, if you don't need a lump sum in retirement, you should be able to use UFPLS - which is taking part tax-free cash and part taxable income on a regular basis - to provide more tax-efficient income.
Ultimately, if you draw down, you have to decide how much to draw and how often.
Truth be told, this is where you have ultimate flexibility with your retirement planning, but as spider-man says "With great power, comes great responsibility".
Once this fund is gone, it's gone.
A financial planner can help you work out how much to draw and how to invest your fund, to ensure it is sustainable throughout your retirement.
Without advice, you will need to do this yourself. Some people are happy to do this, but for others, it is difficult, particularly if you don't know much about how to manage your pension, or you don't have the time or inclination to learn.
Whether you take advice or not, the key thing is that you can draw from this type of pension from age 55 currently, rising to age 57 in 2028.
Savings and Investments
When you think of retirement, you might automatically think "that's what pensions are for", and that's true.
But, there's no reason you can't also draw on savings and investments to supplement pension income, to help you live the lifestyle you want.
Stocks and Shares ISAs can work very well, because they can provide tax-free income, to help supplement your pensions, which may have used up your Personal Allowance and Basic Rate Tax band.
Other forms of income and capital
It may be that you have rental income from a second property, or if you have a partner, they have good retirement plans in place. The point is, it doesn't have to all be about pensions.
Consider what else you might do to raise capital; perhaps you'll want to downsize in retirement. Or if you don't, but need additional capital, you could release equity from your home later on.
Don't also forget that you may get an inheritance or two along the way. It's not nice to think about of course, and we usually don't know when exactly we'll receive them, but inheritances are often significant amounts and can change the course of your retirement picture.
Expenditure
Income, and how much you supposedly need, is just one side of the equation.
The absolute key to how long your money is going to last in retirement, and if you'll have enough, lays in your spending.
Here's one I heard a long time ago and it's stuck with me:
"Show me someone's bank statement, and I'll tell you what is important to them."
If you have a handle on how much you spend, you give yourself a much better chance of working out how much income you need to cover that expenditure, otherwise it's complete guess work!!
Work on the basis that you'll want to spend roughly the same as you do now in retirement, as a starting point.
Then think about the things you need to spend on now that you won't in retirement, e.g. costs associated with work.
Then think about what you would like to do in retirement, to you know, actually make it really enjoyable! Either as a one-off, like a skydive, or ongoing, like playing tennis once a week.
Most of what you do now you'll keep doing and spending on in retirement, but some things will change.
What do I do now?
There's help out there for you to plan your retirement, which can ultimately ensure you're going to be okay, and can look forward to a fulfilling next chapter of life!
We can provide you links to various free resources to help point you in the right direction. If this would be of help to you, just e-mail us: hello@labfp.co.uk and we'd be happy to oblige.
If you'd like to talk to us about providing you with personalised financial planning to help you build your ideal retirement, you can book in a free initial consultation here:
Otherwise, see you next time.
The information contained within this blog post should not be taken as financial advice, as it does not take account of personal circumstances, which would affect advice given. Should you wish to talk to us about personalised advice for you, we'd be happy to do so.