When it comes to retirement planning you will have a lot of questions swirling through your mind. The following are (what I believe) are the five most important questions to ask for your retirement planning:
-When do you want to stop working?
It might not be for another 5 to 10 years but by having an idea of when you will stop working you begin to make plans for it. This planning is both quantitative; what income will need replacing and will you have enough? and qualitative; what do you want your retirement to look like? (see below for more on both aspects).
By giving yourself time it means you won’t go into retirement financially and mentally underprepared. Retirement is a time of huge mental adjustment so the fewer surprises you give yourself the more successful and fulfilling it should be.
The age you give yourself doesn’t have to be an absolute to stick to either (it has probably moved since you first started working anyway when you didn’t intend to work beyond 50 – and children and mortgages were a vague concept), but by having a line in the sand makes your retirement planning that much easier.
It may be that you continue to work through choice because it provides a source of fulfilment and purpose, but as I often tell my clients, it is better to work through choice than necessity.
-What will your retirement transition look like?
Retirement is increasingly a phase rather than a one-off event as we dip our toes into ‘test the water’. This transition may be intrinsically motivated (the wish/need to maintain the purpose, status and identity work provides) or extrinsically motivated (we can’t afford to stop yet, particularly if retirement may be as long as our working lives).
The route will also differ from person to person; a reduction in the hours of the incumbent job, a move to a self-employed consultancy position or non-executive director role or perhaps trying your hand at something differently entirely.
-What will my ideal retirement cost?
The cost of your retirement lifestyle will have a significant bearing on the wealth you need to support it (see the next question). In my experience, most people don’t want a large upgrade in their lifestyle when they retire but they certainly don’t want a downgrade.
There will be costs that will increase or start that might not have been present during your working life (additional or more expensive holidays; leisure memberships and utility bills) but also some that will reduce (commuting costs, daily coffees, work attire).
A worthwhile exercise is to go through your direct debits and bank statements to see what expenditures you do have. Go back over six months or so to allow for the difference in winter and summer costs. From here you will be able to gauge what costs will cease, decrease, start or increase and give you a good estimate of your retirement lifestyle.
-Will I have enough money to live on?
This is the $1m question (or rather whatever your number is). Once you have worked out what the cost of your lifestyle is, you can review what your wealth position is and determine whether your accumulated wealth is sufficient to meet and maintain your lifestyle in retirement.
Answering this question is the cornerstone of financial planning. Done properly, real financial planning makes allowances for inflation, investment returns and life expectancy (amongst other assumptions) to work out whether an individual has enough money to retire (or continue to work through choice rather than necessity).
The conclusion of such an analysis will be one of three outcomes: you don’t have enough and will run out of money in your lifetime, you will be just right or you will have too much (which potentially means more money to the tax man on death and that you held back on your retirement lifestyle when you didn’t need too).
If not, how do I make sure I have enough money to live on?
If your answer to the retirement planning analysis is that you won’t have enough money to live your ideal lifestyle in retirement, you will need to take some actions. And this is why planning well in advance is so important.
You may need to consider saving and investing more into pensions, ISAs and other vehicles or accepting more investment risk. If you haven’t given yourself enough time to build up a retirement pot you are most likely going to have to accept working longer, living a retirement that is less than your ideal or a combination of the two.
Answering these five most important questions for your retirement may take a bit of time. In fact it is probably best that you do take time to answer them, particularly in respect to the first two. The final three can be done more quickly but are still not ones to rush; as the say in the army: “proper pre-planning prevents poor performance”.