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 give you a better chance of maintaining your desired lifestyle throughout retirement.
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 there 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 on the things that you value but will also mean your money is working harder for you. My lifestyle costs layer cake offers a useful way to separate the essentials from the extras.
This expenditure questionnaire can help.
2. What is the cost of your ideal lifestyle?
Include holidays, weekend breaks, entertainment and gifts. Don’t hold back on imagining the life you want, but put a realistic cost against it.
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)
What will your company pension pay, when does it start, and how will it increase?
If you receive rent, allow for expenses and periods without a tenant.
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, subtract your income from your spending. Use the same period and figures after tax. For example, £30,000 of annual spending less £20,000 of other income leaves a £10,000 gap for your pensions and savings to fill. These are invented figures, not pension rates or a recommendation.
Check when each income starts too. Retiring before your State Pension begins can mean a larger gap in the early years.
This is an important number. A shortfall gives you something to address while you are working. If your plan shows more than enough, you might explore retiring sooner, spending more or helping family.
5. Are there one-off costs you need to consider?
Remember the one-off costs alongside your regular spending.
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
By ‘enough’ I mean the money you need in pensions, investments and savings to cover the income gap and planned one-off purchases.
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 may need to last for decades, the amount you withdraw needs regular review. A percentage such as 3% or 4% can illustrate a scenario, but it cannot guarantee your money will last. Tax, charges, investment returns, inflation and the timing of withdrawals all matter.
My guide to working out how much is enough explains how to turn that gap into a plan. If you expect to use investments for income, also consider sequencing risk in retirement.
7. Review your pensions and investment portfolios.
What you do with your pensions now affects your retirement choices. The closer retirement is, the harder it can be to recover from mistakes.
The main things to check are:
- Is your pension fund invested appropriately; neither too little or too much risk?
- Do you understand your total pension charges and the value you receive?
- Are your contributions affordable and appropriate within the relevant tax-relief limits and pension allowances?
8. Start contributing the lifestyle savings into your pension
The lifestyle savings you identified earlier could help you build your pension and investments. A regular contribution makes saving a habit. When a fund’s unit price falls, the same contribution buys more units; when it rises, it buys fewer. This is often called pound cost averaging. It does not remove investment risk or guarantee a profit. Keep enough accessible savings for unexpected costs before committing money you cannot easily get back.
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. Reducing the mortgage can save interest, but check early repayment charges and keep an emergency reserve. Investing instead might produce a better return, but that return is uncertain and you could lose money.
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?
A financial setback can affect both today’s bills and tomorrow’s retirement savings. It is worth checking how long your household could manage without earnings.
Being able to cover the bills when something unexpected happens can remove one source of stress. Start with an emergency fund and check any benefits provided by your employer. Life assurance usually pays on death. Income protection and critical illness cover address different risks, subject to their policy terms. Check the cover you actually have rather than assuming one policy protects against every setback.
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.
Andrew Neligan is a retirement financial planner in East Devon who helps individuals and couples in their 50s and early 60s plan their transition into retirement and create sustainable retirement income
Photo by David Clode on Unsplash
