Retirement is a major life event and financial peace of mind is a vital component. It is difficult to enjoy your later years if you are worried about whether you will run out of money, or are unsure how much is enough. Those with a well-considered plan are in a better position to enjoy a fulfilled and happy retirement from day one.
How can peace of mind be achieved? Retirement planning starts with a clear idea of the type of retirement you’d like to enjoy. The modern retiree comes in many different guises: some will still be working part-time, setting up small businesses or doing consultancy, others will want to travel the world, while some will just want a well-earned rest. Retirement choices come with financial implications and therefore with planning considerations.
At the moment, we are seeing that Covid-19 outbreak is impacting plans. There has been disruption in financial markets, which has pushed some to reconsider their retirement date. Others have reassessed their circumstances, recognising that time is short and they want a break from the office while they are still young enough to enjoy it.
We suggest starting backwards and asking what really matters to you in retirement. Cashflow planning will look at the type of retirement you can achieve – incorporating travel plans, entrepreneurial ambitions and so on. It should also take into account any potential healthcare expenses, such as long-term care. Many people will also want to leave a legacy and this will also influence their finances in retirement. Cashflow planning will help you to understand whether this is possible.
It is important to look at ‘core’ expenses: these will be housing costs, utility bills, any residual education costs for children, as well as more discretionary spending, such as travel. Remember that some bills may disappear – you may have paid off your mortgage for example, or no longer need to pay commuting costs. Ideally, your core expenses should be covered by a guaranteed income, either the state pension, an annuity income or defined benefit/ final salary pension. There will be more flexibility on planning for discretionary spending which ultimately comes down to the sort of lifestyle you want to live.
With a clear picture of your destination, you can start planning how you are going to get there. From there, you can look at the various sources of income you have to support your retirement. This will incorporate workplace and personal pensions, ISAs, rental income and other savings plans. Assessing the gap (if there is one) between the retirement you hope to have and the resources you have available will help you to plan your saving and spending for the next few years.
There are relatively few variables in investment planning. If there is a significant gap between likely income and retirement expectations, you need to get saving quickly, or adjust your expectations. We find it helpful to run various ‘what if I did this?’ scenarios. This allows clients to explore their opportunities and determine what is possible. Do they really want to retire at 65 when they could in fact retire at 60? That’s a full five years’ worth of travelling, spending time with family, taking up a new hobby that can be gained when they are still fit and healthy!
This type of cashflow planning is not set in stone. The recent crisis has shown how even the best laid plans can be blown off course by external events. However, it establishes a baseline, from which it is relatively easy to adjust the different variables and revise expectations. Any good retirement plan will incorporate bumps in the stock market and should work to protect your capital as you move closer to retirement. Having a clear map of your income and expenditure from now into your later years will give you power to make choices and be in control of your life.
To our mind, cashflow planning is key to a successful, happy and stress-free retirement. Cashflow planning aims to be as life-like as possible and provides real clarity. It may allow you to retire earlier than planned or help your children significantly with various milestones. It is the path to a flexible, confident retirement and for most of our clients who have experienced this, they all have one thing in common; they wish they did it sooner!
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.
Please remember investment involves risk. The value of investments and the income from them can fall as well as rise and investors may not receive back the original amount invested. Past performance is not a guide to future performance.
Smith & Williamson Investment Management LLP is part of the Smith & Williamson group.
Smith & Williamson Investment Management LLP is authorised and regulated by the Financial Conduct Authority.