When you get into your fifties life can feel like it’s picking up the pace a bit, the years go by more quickly and the thought of life after work may be beginning to loom large.
The last decade or so of working life is a key time to make sure you are building up enough personal wealth to enable you to maintain your desired lifestyle and ensure your financial security for the rest of your life.
Here is a list of things you should be doing now to make sure that you are financially independent when you wish to be:
1. Review what you are spending your money on.
Are their areas you can reduce or remove expenditure and put the savings into your pension or ISA or reduce the mortgage?
Doing so will not only help you spend only on the things that you value or are important but it will also mean your money is working harder for you.
2. What is the cost of your ideal lifestyle?
This would include holidays, weekend breaks, entertainment and gifts. Now is the time to not hold back on imagining this; if you make some sensible financial decisions now you give yourself a better chance of building up a big enough pot to afford more discretionary spending.
3. What income can you expect to receive in retirement as it currently stands?
What will your State Pension be when you get to that age? (find out here)
Will you be lucky enough to receive a company pension in retirement? How much will it be, from when and how will it increase each year?
Do you have rental income? When was the last time you increased it?
Do you have a spouse or partner who will receive a regular retirement income too?
4. What is the shortfall between the cost of your desired lifestyle and how much you expect to receive?
Once you have worked out the cost of your ideal lifestyle and what income you can expect in retirement you can work out the shortfall (i.e. your known income less your expenditure).
This is a really important number to know because once you do you can take steps to address it. If you won’t have enough you can save more now. If you look like you will have more than enough you might consider retiring sooner, spending more, or giving more away.
5. Are there one-off costs you need to consider?
Before you can work out how much of a pot you need to ensure your financial independence you will need to consider what one-off costs you are likely to incur.
These costs may include: financial gifts to children for house deposits, university costs, “once-in-a-lifetime” holidays, paying off your interest-only mortgage or other debts, home renovations, and new cars.
6. Work out how much is enough
Now you know what your income shortfall in retirement is going to be and what other, one-off costs you expect to incur, you can work out how much is enough.
By ‘enough’ I mean how much money you need in pensions, investments and savings that you can draw upon to make those purchases and plug the gap between your income and the cost of your lifestyle.
There are a few points to note on this:
- The longer you expect to live for the bigger the pot will need to be,
- You will need to allow for the effect of inflation increasing your cost of living and eroding the purchasing power of your money.
- Because the pot needs to last for the rest of your life you should avoid withdrawing too much from pensions and savings etc each year. A sensible guide is between 3% to 4% a year.
7. Review your pensions and investment portfolios.
The actions you do or don’t take with your pensions now will have a big effect on how much you have to play within retirement. And, the closer retirement is the harder it is to recover from mistakes.
The main things to check are:
- Is your pension fund invested appropriately; neither too little or too much risk?
- Are you overpaying in charges?
- Are you paying as much in as you can?
8. Start contributing the lifestyle savings into your pension
The lifestyle savings you hopefully identified early can be put into your pension and investments now. The benefits of making regular contributions are that it becomes habitual; the money leaves your bank account without you having to think about it, you are building up your wealth and benefit from what is known as Pound Cost Averaging. Pound Cost Averaging is the simple principle that when market falls in any given month, you buy more shares for the same amount of money.
9. Is your mortgage on the most appropriate rate?
Now is also a good time to review your mortgage. Firstly, can you afford to pay it off, or at least make an overpayment?
If you can’t afford to pay it off, at least reviewing the rate you are on when it expires can be a simple way to reduce your monthly, essential expenses.
I’m often asked if paying off the mortgage is a good thing. I cover it in detail in this post, but in summary, it’s never a bad thing to pay off debts but doing so could be an opportunity cost; you might save money but your money could get a better long-term return being invested in the global equity markets.
The choice you take will largely be governed by your willingness to accept investment risk (video), your need to do so, and how long you plan to invest.
10. How resilient is your financial situation to shocks?
Life has a tendency to throw curveballs. We can’t avoid them but our ability to withstand them depends upon how prepared we are.
- What happens if you have an accident or illness and so lose earnings that you can’t replace?
- What happens if you lose your job?
- What happens if you have an unexpected and large capital outlay?
- What happens if your spouse or partner dies leaving you without an income?
In the last decade of working life it can be hard to recover from financial setbacks which can have a twofold cost: firstly there is no income coming to pay the bills but also, pensions and other savings plans stop meaning future financial security and independence is threatened.
By making sure we can at least cover the bills when something unexpected happens, we can at least eliminate one source of stress. We can do this by making sure we have an emergency fund of savings to draw upon and have sufficient life assurance so that we receive money in the event of a death, accident, or illness.
So, there you have it, 10 things you can do in your fifties to ensure your financial independence. If you would like to discuss this post in more detail and see how it relates to your situation, please do get in touch.