The amount of money you’ll need to enjoy a retirement free from financial constraints will vary depending on your circumstances and retirement plans.
There are various sources of advice that can guide you on the best ways to save, and the best ways to draw income from your saving pots in the future. But ultimately, you’ll only get it right by considering all the different variables for your unique position.
What is your current financial position?
You may have ambitious goals that will provide you with the retirement you have always dreamed of, but do you currently have the liquid assets to keep up with that plan? And, perhaps most importantly, is it a sustainable plan that can work with your shorter-term goals, so that you can maintain the style of living that you deserve before retirement?
What does your dream retirement look like?
For many, retirement can provide the freedom to enjoy travel, expensive home renovations and new hobbies. Consider what expenditures will be essential and how much you’d like to keep aside for luxury purchases and create a year-on-year retirement budget that you will then need to compare against your current financial position.
What is your life expectancy?
If you retire at 55 and then live until you are 104, you are going to need a much bigger pension pot than if you retire at 83 and die a year later. Of course, nobody can predict the future, but an estimate can be useful to help budget in a practical way. People are living longer. Also, consider the life expectancy of your spouse and whether you want to leave behind a legacy to your children/beneficiaries.
Where will your money come from?
Ideally, your retirement should not all rest on a single income. Look at all your different revenue streams and the expected income from those. Consider any final salary pensions, defined contribution pensions and state pensions, but also look at income from rental and other investments. It’s also important to consider how much you will receive from each source and what tax implications this will have. Can you be more tax-efficient by taking income in different ways?
What are the stipulations on your income?
For example, if you do have a final salary income, how will this affect your partner if you predecease them? Does the annual pension payment drop to 50%? Will that leave your spouse with enough money to maintain the life they want?
How are your investments performing?
Although investments outside of pension wrappers can provide useful money streams in retirement, it is unlikely that you’ll want to take the same level of risk with your investments in retirement. Does this mean your investments will deplete at a faster rate if you are achieving a lower return? And will this affect how much money you drawdown from your investments?
4% Withdrawal Rate
This rule follows the thought process that if retirees withdraw 4% from the total value of their investment portfolio in the first year of retirement. And then each following year, allowing for increases in inflation. This should be sufficient as not to deplete funds. However, market conditions — namely, lower projected returns for stocks and bonds, don’t seem to be working in retirees’ favour. And given the recent increases in inflation, alongside market expectations, the 4% rule may no longer be feasible. According to a recent paper published by researchers at Morningstar. These days, the 4% rule should really be the 3.3% rule. So you might need more than you first thought.
Cashflow planning in retirement
Building your individual retirement cash flow plan involves assessing your current and forecasted wealth, along with your income and expenditure. Using assumed rates of investment growth, inflation and interest rates, to build a picture of your finances now and in the future. Cashflow planning is an excellent tool to help you plan sources and uses of cash in retirement.
A financial adviser can also help you to plan your taxes with cashflow models, in order to make your money go further. Helping to boost your retirement savings.
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