Financial Planning for Retirement

Financial planning for retirement is about more than just understanding pensions. It encompasses everything required to make sure that you have enough money to meet your needs in retirement. This means being able to meet your day-to-day outgoings, managing down any debt before you retire to reduce your expenditure, organising insurance for potential care or health needs, and planning for emergencies.

This kind of planning needs to start well before retirement itself. However, it is also important that you continue to review your situation periodically once you are retired. This page explains more about what you might need to consider, and how to go about the process of planning financially for retirement.

Planning Before Retirement

What should you consider when financial planning for retirement? And when should you start?

As our page on Understanding Pensions explains, the earlier you can start paying into a pension, the better. However, that apart, the serious planning for retirement does not need to start until you are in your 40s or 50s. After all, before that you have other things on your mind, such as building a career, buying a house, and starting a family. You don’t really have all that much time, energy or money to be worrying about retirement!

However, once your children are growing up and leaving home, it is a good time to start thinking of yourself again.

By this point, you probably have a much clearer idea about how you want to live in retirement. You can set out some goals and objectives—and our page on Planning for Retirement: Getting Started explains more about this process. Once you have those goals in place, you can then think about how you are going to fund them.

At this stage, it is a good idea to carry out a thorough financial review. This should cover:

• Any debts, including—or perhaps especially—a mortgage.

  You should be considering how and when you will be able to pay off those debts.

  Crucially, you need a plan, and that probably shouldn’t just be ‘my estate will cover the cost when I die’. For example, do you plan to use a lump sum from your pension to pay off your mortgage or other debts? This is viable, but will obviously have implications for your ongoing income.

  You also need to be mindful of acquiring any new debt. Yes, a new kitchen or conservatory might be nice—but do you really still want to be paying for it when you are retired?

• Your pension contributions and your projected income.

  Hopefully you are already paying into a pension, and have been for some time.

  However, now it is a good time to look at your contributions and your projected income in retirement. Will you have enough to fund your needs? If not, can you increase your contributions, or do you have other potential sources of retirement income?

• Other investments and contingency funds.

  What, if any, savings do you have to cover any emergencies and contingencies?

  Our page on Financial Contingency Planning explains that the general recommendation is to hold between three and six months’ income as savings to protect against emergencies. It is, however, worth remembering that you will not necessarily be able to replace your contingency fund once you are retired, and generating a larger fund may therefore be advisable.

  If you have savings invested, it is also worth checking the structure of the investments, and the risk profile that was used when setting them up. This is particularly important if you have not been reviewing them periodically anyway. Your appetite for risk is likely to reduce over time, especially if you might want to withdraw money from your investments to fund things like moving to part-time working.

  Our page on Understanding Investing explains more about what this means.

• Insurance policies.

  What insurance policies do you already have in place, and do you need to add others?

  Many people with a mortgage also have a life insurance policy that will pay enough to cover the mortgage should they die. However, if your mortgage has reached its term, your policy may also have done so. It is worth checking exactly what insurance policies you have, and on what terms.

• Potential outgoings to support your children or parents.

  It is worth considering whether you may need to spend anything to help your children or parents out in the next few years.

  For example, will you want to help your children to buy property? If so, how will you do that? Downsizing and giving them a share of the proceeds may be worthwhile if you do not have large cash reserves—especially if you are concerned about the cost of maintaining your property into retirement.

• Your current and future outgoings.

  Possibly surprisingly, most of us have very little idea what we actually spend each month. Money comes in and money goes out—and few of us know what exactly is spent on groceries, fuel or fun.

  It is worth having a look at your outgoings and plotting your broad requirements over a year.

  Take an hour or so to work out what you actually spend each month, and the cost of one-offs such as car servicing or insurance. Consider how much of your spending is likely to continue at the same level in the foreseeable future. This will give you a good understanding of how much money you need as an income—and whether your current lifestyle will remain affordable.

Potential Changes to Make After Your Financial Review

Once you have reviewed your financial situation, there are some changes that you may wish to make.

These may include:

• Maximising your tax efficiency.

  In your 40s and 50s, your financial situation is likely to be very different from when you first started your career.

  Pay rises over time may have tipped you into higher tax brackets. You or your partner may have taken time off when your children were small, or one of you may have taken a career break to look after elderly parents. This may have left the other to earn more, and this may have affected your shared tax situation.

  Whatever your personal circumstances, it is worth checking that you are managing your income in the most tax-efficient way.

  For example, some countries allow a personal tax-free allowance to be transferred between partners. This means that if one of you is not earning, the other can use their allowance, reducing the taxes paid by the two of you in total. You should aim to be maximising your savings into tax-efficient options, such as ISAs in the UK. Paying more into a pension can also be a very tax-efficient way of saving.

• Changing your insurance structure.

  Insurance is a way of managing risks that your savings will not cover, or that you do not want to cover yourself.

  It is therefore a good way of managing a contingency fund that is rather smaller than you would like, and you may wish to consider whether you should hold various types of insurance. For example, one way to manage the risk of (say) needing a new boiler is to take out some kind of household contingency insurance.

  As well as life insurance, policies such as critical illness cover can give you reassurance that you will have an income in the event of being unable to work. You may also wish to consider an insurance policy that will pay out enough to cover the cost of your funeral, or any inheritance tax.

  Another key area of insurance cover is for healthcare or long-term care costs. This is one of the issues that people tend to worry about in retirement.

  Some countries have state-funded healthcare, but few provide entirely free social care (care in a residential or nursing home, or support with living at home). More often, there are fees to pay. For those going into care or nursing homes, this may require the sale of the house, and using up any savings. Insurance provides a way to meet those fees—but can be quite expensive, especially if your underwriter judges that you have a high chance of needing a payout.

  Insurance Caveats

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  It is worth being aware that your ability to take out any type of insurance will depend on your likelihood of needing it.

  For example, if you have a long-term chronic health condition, you are unlikely to find many insurers willing to give you critical illness cover that includes that condition. You may also find that this type of insurance is extremely expensive, and you might prefer to save the premiums into a contingency fund instead.

  Similarly, if you live alone and are older, you may find that the cost of long-term care insurance premiums are prohibitive. However, a policy taken out when you are younger may be much cheaper.

  You may find it helpful to read our page on Choosing Insurance. It may also be worth talking to a specialist broker or financial advisor to make sure you have the right insurance for your needs.

• Planning for death or incapacity.

  It is always important to plan for the worst.

  While it won’t matter to you what happens after you are dead, it is likely to be very important to those you love. Take time to write a will, and also make contingencies for what happens if you are incapacitated and unable to make decisions for yourself.

  If you already have a will, review it to make sure that it still expresses your wishes.

  For example, many people make a will when they first get married, and only realise many years later that they have made no provision for their children or a subsequent divorce and remarriage.

  Our page on Planning for Death and Incapacity explains more about this important topic.

• Changing your investments to a lower risk profile.

  As you get towards retirement, it may be a good idea to reduce the risk profile of your investments.

  When you first start investing, the big risk may be worthwhile for the higher rewards. However, as you move closer towards needing the money, it can be good to reduce your risk profile to avoid big rises and falls in the value of your investments, and ensure that you can draw on them whenever you need.

• Changing your working pattern.

  You may want to change your working pattern to better meet your financial and lifestyle goals.

  This might go two ways:

  • You might want to reduce your working hours to give you more time to relax or enjoy life, perhaps in semi-retirement; or

  • You might want to work more hours to build up your retirement funds while you still have capacity to do so.

  Either way, this might require some thinking and negotiation with your employer.

Making Lifestyle Changes

One area that is worth considering early—either before or at the point of retirement—is lifestyle changes.

Strictly speaking, this may not be exactly financial planning, but lifestyle changes can have a huge impact on your financial situation. They are therefore worth considering.

You may not feel the need to ‘downsize’ at 65 or 70 years old. However, it might be less traumatic to do so voluntarily at that age than to have a move forced on you five years later because of an illness or incapacity. Similarly, if you want to move closer to family, it may be easier to do that earlier, while you still have plenty of time to ‘put down roots’ in the new area.

Moving from a bigger house to a smaller one can be a good way to free up some money, especially if you have owned your house for a long time. If you rent, downsizing can reduce your outgoings. It may also make it harder for you to host visitors—but this could also reduce the potential for your children to ‘boomerang’, so you might feel that it is a bonus.

Financial Planning During Retirement

However carefully you plan beforehand, you will still need to do some financial planning during your retirement.

It is advisable to review your situation annually and/or when anything changes to ensure that you still have enough money to meet your needs. You should also use this opportunity to consider insurance, contingency planning, and the other issues discussed on this page.

A good understanding of your financial situation, maintained over time, will help to ensure that you are not caught out by the unexpected.