With confusion surrounding Osborne’s pension reforms and freedom, Charlie Reading – author of ‘Dream Retirement’ and one of the UK’s top financial planners (rated top 10 by Sunday Telegraph), tells us how save for a happier retirement…
If you want to know how much money you need in retirement, whether you will run out of money, or whether you will be able to afford to do your ‘Bucket List’, you need to gain clarity on your future.
Your required income will be different to anyone else’s, because your life is different to anyone else’s. Rather than accepting the hand that you are dealt in retirement, like so many people do, make sure you know how much money you need in retirement, and how you can best generate it from the money you already have.
This is best achieved by carrying out a few exercises. The first is to create a retirement budget, so you know what your essential and your luxury expenditure will be in retirement. Only once you know what your monthly expenditure currently is, therefore what it will be, can you plan for it.
Secondly, you need a Lifetime Cash Flow Forecast to tell you whether you have accumulated enough or are saving a sufficient sum to deliver that required income when you plan to retire. This could be a basic spreadsheet that you put together yourself, a tool you find online or a more detailed analysis from a Financial Planner. As long as you have factored in inflation, realistic growth rates and tax, you are off to a pretty good start. The more sophisticated you go though, the more accurate the plan is likely to be and the more different scenarios you can model.
Balance Risk vs Reward
The money you have saved for your retirement, whether it is currently in a pension, savings account, property or NISAs needs to deliver you the best return possible for a level of risk that you are comfortable with. Some people will say that they won’t take any risk; the problem is there is no such thing. If you put your money into a bank account, your capital is (almost) guaranteed not to go down, but this is not ‘no risk’. If you are getting 2% interest and inflation is 3%, your money is falling by 1% a year in real term, i.e. what you can actually buy with it.
Most people take too much risk with their investment choices because they do not spread the investments diversely enough. Understand your own tolerance to risk and then use the asset allocation and the spread of the investments to generate you the best returns possible for that level of risk. Don’t have all your eggs in one basket, so make sure you don’t just have property, shares or cash, as otherwise you will get a nasty shock in the future.
Minimise Tax through Your Income Strategy
By understanding the way the tax system works, you can manipulate your retirement income to minimise the amount of tax you pay. By doing this, you can draw out the income you need whilst making the least possible impact on your assets. The tax system changes each year, so this is where flexibility and a balance of different tax wrappers really will help.
For example, having a balance of State Pension, Flexible (Drawdown) Pension and NISAs allows you to changes your income each year in line with the tax regime, thus minimising the damage your required average retirement income has on your portfolio as a whole.
Time is Our Most Precious Resource, So Use It!
Time is our most precious resource; after all, without it no amount of money, love or fast cars will be of benefit to you. Retirement creates a huge shift in what you do with your time. Some people excel with this new found freedom, and some people curl up into their shell and become a shadow of their former selves.
To really create a Dream Retirement™, you need to plan what you are going to do with your time. There are several things you can do here, and I cover them in a lot more detail in the book, but here are 3 key areas to success:
- Build the ‘Bucket List’ of your dreams, so that you have some exciting things to plan and tick off.
- Make sure you know what your purpose is in retirement, as otherwise you will feel rudderless.
- Design your Ideal Retirement Week, so that you structure your week into great ‘Focus Days’ and ‘Buffer Days’, where you pick off the must do jobs that don’t excite you
Be the Healthiest You
Countless amounts of research show that if you want to live long into retirement you need to look after yourself. If you want to spend more time on the golf course than the in the hospital, then now is your chance to get yourself into the best shape possible. Take small simple steps to achieve this, and you will be amazed at what you can achieve over time.