If the daily grind of work is making you contemplate retirement, some of these questions may be running through your mind:
How do I know if I can afford to retire?
If you’re fortunate enough to have a “final salary” pension and are perhaps nearing state pension age, this will be relatively straightforward to answer. The Isle of Man Government is an example of an employer with a final salary pension.
You need to know whether these two pensions are enough to cover your ongoing expenses and cost of living.
This form will help you establish your “burn rate” each year, compared with your projected income from your final salary and state pension after tax.
However, most people won’t have a large final salary pension, so how do I work out whether I’ve got enough?
People often have a pension “pot” (or pots) that have been invested for their retirement, either in a work-based pension scheme or through a personal pension/s. You may also have some other assets in your war chest, such as bank savings accounts/deposits, shares, a rental property, investment funds, or bonds of some description.
There are more moving parts here than a final salary scheme when it comes to retirement; therefore, it’s more difficult to map your financial future. This is where using a financial adviser can help by running a lifetime financial forecast for you.
Working with a financial adviser creates a retirement plan to show whether your pensions/assets and projected income streams (from the state pension, for example) are enough to cover your projected expenditure.
This process will address several vital questions often running through people’s minds, including:
-Whether you can afford to retire, and if not now, then when?
-How much you can afford to spend each month/year without fear of running out of money?
-The type of holidays / travel you can afford?
-Whether you can afford to make gifts to your children in retirement, for house deposits or university support, for example?
-Whether working part-time in a job you like might help balance the books?
-Whether downsizing could be the key to unlocking funds down the line, perhaps when the kids have left home?
-Considering one-off expenses, such as car upgrades and home improvements, and things that come completely out of left field. Is there enough to cover them?
-The impact of a spouse/partner dying and what would happen financially in this situation?
How should my money be invested in the lead-up to and in retirement?
The above exercise will reveal how much (if any) money you should have invested during your retirement. It will also indicate the rate of return required to safely reach your retirement goals, for example, whether this can be done by holding all of the money in bank deposits or whether a higher rate of return is required by investing some of it.
What are we talking about by being “invested”?
The stock market can sound scary, but it’s simply a means of investing and sharing in the profits of the companies we are exposed to every day….Amazon, Microsoft, Apple, etc., to name but a few.
What about market crashes, and how will this affect me if I’m still invested in retirement?
A solid financial forecast should be stress-tested. In the past 30 years (a period that many people will spend in retirement), we have seen events that have led to sharp temporary falls and subsequent recoveries. This is a feature of being invested.
The reward for enduring a certain level of volatility has been superior returns versus holding bank deposits and, therefore, a better retirement in financial terms.
What about tax?
A retirement plan should consider tax when building an efficient plan and ensure that all available allowances are considered.
Will I have enough to do? How will I fill my day?
This answer is as important as the above financial considerations. It needs real thought.
A retirement of boredom and lacking of purpose is not what the doctor ordered: https://www.thorntonfs.com/ready-to-retire/
Feel free to contact me for a free call if you would like to discuss any of the points in this article.
