The closer you are to retirement, the more important your retirement planning becomes.
The last five years of work may be some of the most critical of all. If your plans are in place and your pension pot has grown to a level that can provide the income you need in your retirement, you may be able to relax and look forward to a life of ease.
However, you will need to review your pension regularly to make sure that the pot is maintaining its level to maintain your retirement income. The value of a fund is not guaranteed; it may go down as well as up in line with investment performance.
But are you confident that you have made all the provisions you need for the kind of retirement you want? If not, you have five years to hopefully get back on track – or you might find that you will be working a lot longer before you can afford to retire.
The first step in your five-year planning is to work out how much you will need in retirement.
A single pensioner needs an annual retirement income of at least £12,800 to fund a minimum lifestyle, according to the Pensions and Lifetime Savings Association.
But you will probably want to cover more than your basic needs. You will want enough cash to run a car, perhaps, and to enjoy holidays and evenings out. You might want to maintain your current lifestyle rather than try to enjoy a life of self-denial.
Your outgoings may be reduced. You will not need to commute, and you will not need to save for a pension once you retire, but other costs will be much the same – and likely to increase in the years to come.
75% of your current income might be something to aim for, but you need to be certain that you can cover all the costs you will still be faced with.
The big problem is inflation. It might not be running at 10% in five years’ time – but there is no guarantee of that. Already many pensioners with fixed incomes are seeing their pension pot running out much faster than they anticipated. If you don’t want to join them, you need to add a hefty margin to your projected monthly spending forecast.
Look at your monthly expenses now – and look what they might be in five, ten, and twenty years’ time. How far into the future should you be looking? Youcan make an estimate based on your general level of health and family history. For example, if your family typically live into their 90s and you are in good health, then you may want to assume that you’ll still be around at that age. But remember – you may not be able to live as independently as you do now – you might need to budget for the costs of care.
The full state pension is around £10,600 a year. By itself it’s not enough for a comfortable retirement, although it does make a big contribution towards it. But it needs to work alongside your employer’s or your private pension. If you qualify for the full government amount – £203.85 a week at present, or £10,600 a year – you need to find at least an extra £2,200 a year from your personal savings to fund even the most basic retirement.
You will probably want a sum comparable to your current income. To understand whether it is realistic you need to look at your employer’s and personal pension plans, and your savings and investments, to see exactly what your income will be.
If your calculations show that you are not financially prepared to retire in five years, here are some things to consider:
- Could you make changes to your planned retirement lifestyle that would reduce your expenses?
- Could you increase your retirement account contributions enough over the next five years so that they’ll produce sufficient income once you retire?
- Are there other sources of income that you could call on?
The best way to find the answers is to get expert help from an Independent Financial Adviser (IFA). They can help you look at your five-year retirement plan, and help you make your money work harder so you can enjoy the retirement you deserve.
If you haven’t got an IFA then please talk to us or see: Finding an adviser | FCA