What will you do when you retire?
Retirement is a time for trying new experiences for lots of us – travelling to exotic destinations or taking up a new hobby. But it can all cost a considerable amount of money. Activities such as volunteering, or spending more time seeing the family, are likely to have some financial costs attached to them. And, even if you just want to put your feet up at a place similar to a 55 plus community in Utah County, you’re likely to still want to keep up a similar standard of living to what you have now.
Simply thinking about what you’ll do, how you’ll be able to do it, and when you’ll be able to do it, is an investment in your future self.
When will you retire?
Longer life expectancy means that many people are retired for over 30 years, factoring this into retirement planning will help ensure that you don’t run out of money prematurely.
For many people, the age of retirement is very much a personal choice. Some can’t wait to retire, others hope never to. The main thing to consider is when you want to stop or cut down on work and what steps you can take now to protect your finances accordingly. The age when you’re eligible for the state pension can be an important factor in this planning. But for some, the age when they retire may not be down to personal choice. You might lose your job and find it very hard to get another or an illness or injury might prevent you from working. Having plans in place for every scenario will ensure that you are financially secure in every situation.
Where are you now – assessing your financial situation
The next step is to work out what you currently have, and what you might have available to you once you retire. In addition to your pension, collate any other investments such as savings or individual savings accounts (ISAs) and factor in any likely inheritances you may receive. You should also consider any outstanding debts you may have such as a mortgage, ensuring that you are properly managing this and paying down the debt may also factor in how and when you retire. Whatever you have or plan to invest in, remember to take inflation into account when assessing current and future assets, as well as expenditures.
Talk to the professionals and formulate a plan
Seeking professional advice to formulate a plan is always a sensible step. There are two types of financial professionals who are worth contacting. The first is a financial planner, who can help you work out exactly where you are now. They can also produce a lifetime cash flow plan for you so that you can get a better understanding of your income and expenditure over the course of your life, including retirement.
The other professional who could help you is a financial adviser – in particular, independent financial advisers (IFAs) who aren’t restricted in the advice they can give. Some financial advisers also offer financial planning assistance. Financial advisers’ main task is to advise on suitable pensions or investments.
Develop an investment strategy
It’s important to develop an investment strategy that’s closely aligned with your goals. Remember that the most important factor is to start investing as soon as you can. It’s also worth considering any allowances you might have – ISA allowances and tax relief for example – and how you might maximise them.
ISAs are generally an attractive and tax-efficient way of saving, and many people choose to have ISAs alongside their pensions. For both ISAs and pensions, you have the choice of investing for income or for growth. Each has its own merits, but if you do choose an income, then any income from pensions will be automatically reinvested.
Implement the plan
Now it’s time to actually invest – an IFA can help you make the right choices here. As well as making choices that match your risk profile, think about where you might invest and with who. Some investments focus on certain sectors, such as property or technology. Others will vary by geography or might specialise in other criteria, such as ethical investments, or in smaller companies. Some investments have much higher charges than others, so always check the small print.
For most people, making regular contributions is the way forward. Not only does it serve to build up your investment, but it also becomes part of your regular budgeting, which lowers the temptation of simply spending the money now.
Monitor your plan
However, whenever you invest, the more you can contribute and the earlier you can contribute, the greater chance your investment has of growing. Always keep track of your investments and ensure you are reaching your key goals. But do resist the urge to keep looking at your investment’s performance, reviewing on an annual basis is a good measure.
Planning for all circumstances
As always, expect the unexpected – or at least plan for it to a reasonable extent. Forced early retirement, health issues, family circumstances, having to care for others – all of these and more can mean you might have to reassess how you’re saving for retirement, as well as when you might actually retire. Consider taking out insurance relevant to your circumstances. For example, life cover and income protection.
James de Sausmarez, Head of Investment Trusts, Janus Henderson comments: “It’s great to see that women are making the decision to invest earlier than men, and it certainly gives hope that the industry is making some headway in helping close the gender savings gap.
The majority of those surveyed cited a lack of spare cash as the primary reason they didn’t start investing earlier, which is particularly poignant in the current context of rising living costs. Young investors are right to prioritise building up a cash pot and reducing ‘bad’ debt, but investing doesn’t have to be about large chunks of capital. At the heart of the issue is financial education – it’s crucial that first-time investors understand that the first pound invested is in many ways the most important one because starting that process as early as possible, regardless of how much or how little money it involves, is the first step towards achieving that goal of ensuring a comfortable retirement.
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