How long do you have to go before you retire? For me, I’m thinking of a horizon of about another 10 years. I’ll qualify for my State Pension a little earlier than that, but as long as I’m still enjoying my work I see no reason not to carry on.
But when you get within a decade of retirement, there are some things I really think you need to get sorted out.
You really need to get on top of your personal balance sheet. And by that, I mean start by totting up all your assets which you will rely on for funding your retirement.
That includes money in any savings accounts, ISA, pension plans etc. Any insurance products, endowments? Add them all up. On top of that, if you own your home, how much is it worth? Do you have any outstanding mortgage? Will you downsize on retirement, or just move somewhere cheaper? That needs to be worked out too, as cash freed up from your home can make a big difference to your retirement funding.
I’ve already mentioned mortgages, but you also need to account for all debts too, as they will all come off the cash you’ll have to fund your old age.
Next up is working out what level of income you’ll need after you retire. If mortgages and all other debts are paid off by then, you’ll obviously need less.
There may be plenty of other outgoings that will be significantly reduced by then too. For example, there should be no transport expenses commuting to work and back. And even things like lunch expenses could make a difference — it’s easy to spend £5 per day on lunch at work, but that adds up to around £1,300 per year.
Once you’ve done that, you can do some calculations based on your total assets and estimate what levels of income you’re likely to achieve. Thinking of investing in dividend-paying shares to provide regular income? Work out how much you might get at different yields — 3% per year, 4%, etc.
Don’t forget, of course, to include your State Pension and any other pensions in your expected income too.
I’m constantly surprised how many people have no idea how well off they’ll be as pensioners and are essentially just stumbling towards retirement day in hope and without a clue if they need to do anything today.
My own retirement planning was fairly vague until recently, when I went through the process of transferring out of a protected-benefits pension scheme. It was a fraught process, but it did force me to do all the necessary sums.
Once you’re on top of your assets and your likely income, you’ll be able to adjust your plans and strategy if you need to. Need to invest a little more each month? With 10 years left, you could still make a significant difference.
Would it be better to defer your State Pension, work a few more years, and retire with a better income and more cash in the bank? You can’t even start to make such decisions until you fully understand your current financial situation.
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