In your fifties or sixties you should be thinking about retirement – and how to plan for it.
One of the biggest worries for people of this age is how to best fund your lifestyle once you have stopped work. The average age of people retiring from the workforce is currently around 58. But over the next few decades this is forecast to rise considerably. .
A major difficulty is that the goalposts are often changing, making it impossible for savers to accurately plan. It is expected that increases in life expectancy will automatically trigger a rise in the state pension age, which is likely to rise to 70 within 50 years, if not sooner.
Most pensioners rely on state benefits for a base level of income, but the state pension age, currently 65 for men and is nearly 63 for women*, will be 65 for both men and women by 2018. It will then rise to 66 by 2020 and to 67 between 2026 and 2028. The “private pension age”, when you can access your own savings , is currently 55 but will most likely be fixed 10 years below the rising state pension age.
Drastic changes in pensions also muddy the water in terms of retirement planning. The new pension freedoms, introduced in 2015, offer more choice and flexibility, but have added confusion as savers don’t know which products will give them the best retirement.
Create spreadsheets for what you’ve got – and what you need
Getting your pensions and other savings (Isas, other savings and property) in order should be your top priority. This may mean locating old company pensions and bonds held with banks and building societies you took out years ago, which can take a few weeks. Once you’ve worked out what you’ve got, decide when (roughly) you want to retire and the income you’ll need to live to the standard you’re expecting.
Draw up a budget of everything you spend now, and then do the same for your retired self. Consider that you might want to spend more on travel and other pursuits. Calculate all your potential sources of income in retirement.
Maxmise all types of savings
Make full use of your company pension, if you have one, as your employer will contribute too. Or you could consider setting up a self-invested personal pension (Sipp).
You can also top up your pension with a lump sum. You should also be aware of the benefits of “recycling” pension money to make the most of tax relief on contributions. Anyone aged between 55 and 75 can withdraw up to £7,500 in a year from their pension pot and put some of it back in again, gaining a tax advantage as a result. For every £1,000 paid into a pension by a basic-rate taxpayer, £200 (20pc) is paid by the taxman. So your contribution of £800 effectively benefits from an instant 25pc (£200) boost.
Come up with an income strategy that suits your lifestyle
Most commonly, retirees tell financial advisers they want a secure income to cover basic costs but also with money invested in a flexible way, giving them more opportunity to keep growing savings. A dual approach to annuities and drawdown could solve this dilemma.
Build a balanced portfolio of investments
For most investors in early retirement, a “balanced portfolio” of stocks, shares and bonds will meet their investing needs (see table).Fidelity calculations demonstrate how two £100,000 portfolios with average 6pc a year returns – one with good performance in the first few years – and one with poor performance in the first few years compare. A retiree drawing £5,000 a year from the first portfolio would still have £240,000 after 25 years.
But a retiree drawing £5,000 a year from the second portfolio would run out of money after 20 years. This means retirees using drawdown to fund their lifestyle may need to cut their coat according to their returns – if they want to preserve their funds over the long-term.