Budgeting for retirement

If you’re prepared financially and physically healthy, retirement can last decades.  Retirement is both an event and a process. In one plausible scenario, your benefits and savings must cover your expenses for three decades or more. The expenses at each stage of retirement are associated with how you choose to spend your time, where you decide to live, and how your health holds up. If you take these factors into account and evaluate how they will change throughout retirement, you can budget accordingly.

To help with this process, we have identified four stages of retirement, each stage has different expenses and requires distinct approaches to budgeting. Here’s what those stages look like and how to handle your finances accordingly.

Pre-retirement Stage
Pre-retirement is the stage just before retirement.  You are still working, but retirement is approaching and you’re finally getting a clear picture of what your income, and expenses will look like. You’re also getting closer to figuring out what you’ll do with your days once you’re free to fill them as you please. What seemed merely theoretical earlier in your working life now starts to seem real.

At this stage, assess your likely income and expenses after you exit the workforce?  Will you have paid off your mortgage, and if not, how much do you still owe and for how long?  You may be in a strong enough position financially to seriously evaluate whether you can afford to retire early.  If you run a family business, this is a good time to create a succession plan.

Pre-retirement is also a good time to re-evaluate your monthly and annual expenses and cut back on costs that have crept up over the years.  Eliminate any wasteful spending and give your retirement budget some breathing room. Also, at this stage (as well as, possibly, the early stages of your retirement), you may still have major expenses like putting your children through further education, helping them with a deposit for a property, or paying for a wedding.  Finally, you might want to replace your usual vacations with trips to places you’ve envisioned yourself moving to during retirement.

Early Retirement
Some of the biggest changes in your budget will occur when you first retire. You’ll no longer receive a regular salary and you’ll need a plan for managing your income during retirement. You might also lose employer-sponsored health insurance.

You may be tempted to go on a spending spree at this early stage of retirement. You’ll have a lot of free time, while still healthy and energetic. In this phase, you might want to buy that sports car you’ve always dreamed of, take an extended European vacation, go to culinary school, or take up sailing. With more freedom to travel, you may want to buy a holiday home to escape the British winters. you can however quickly deplete your savings if you treat retirement like winning the lottery.

One way to manage new expenses in early retirement is to consider a part-time or seasonal job, start a business that gives you flexible hours. Earning £20,000 a year when you need £40,000 is a serious problem, but once you’ve retired, it looks better than earning nothing, and at this point, it’s more about personal satisfaction, anyway. You can also balance the expensive activities you want to spend time on with inexpensive or free ones: volunteer to train service dogs, teach a photography class at your local community centre, or lead biking excursions.

Middle Retirement
By middle retirement, you’ll likely be receiving State Pension.  In addition to receiving more income in this stage, you might be tired of some of the travel and new activities you pursued during early retirement, so your expenses might decrease. You might want to travel less and stay home more, or your travel might be centred around less expensive trips to visit your grandchildren and other friends or family. With luck, your children are established enough in their careers that they no longer turn to you for money.

Late Retirement
You might have new expenses in late retirement if you move to an independent or assisted living facility or if your health means you need to move to a nursing home or hire a home health aide.

You’ll want to reassess your savings and decide whether you should be withdrawing money at a faster or slower rate. If you’re running low on cash and you still live in your home, you might consider Equity Release as a source of funds. Looking at what you have left, you’ll need to think about what you want to spend during your lifetime and what you want to leave to others.

Complete our Budget Calculator and we will send you a report.  This will help you see your current expenditure.

By Philip Harper  |  July 2020

How close are you to achieving your retirement goals?

We also move from a position saving for the future, to spending now and watching our savings reduce to fund our retirement, which is a significant shift in the way we think about our financial positions.

The retirement decision is an exciting opportunity to transition into a different phase of our lives and will start with some fundamental questions such as…

• Can I afford to change my work / life balance?
• When can I comfortably retire?
• Can I afford my dream retirement now?

 …and quickly gets into the detail….

• I have pensions through different employers?
• Should I opt for a “guaranteed” income in retirement?
• Should I continue to invest my pension fund to provide me with the income I need?
• Will my family have access to my pension wealth should I die?

 The best way to remove the complexity is to build a financial plan to model your income from your total accumulated wealth. This will help to simplify the retirement options available to you. From the equity in your house through to your pensions and savings, our cash flow planning tool can take in your data and deliver a snapshot of the future and help you shape your retirement to make the very most of your assets.

By Andy Robinson |  July 2020

Are homes now retirement cash machines?

Remember when a mobile phone was just that: a mobile phone? When it didn’t connect us to the internet, act as our diary or tell us when the next train is due? Much like our mobiles, the retirement world has changed. The old established view that our income in retirement will be based primarily on our pension will not be enough for most of us anymore.

We need a new way of thinking about retirement. For the majority of us, property is our biggest store of wealth. Yet property is currently used much less than pensions in retirement income planning.

It’s important to think more holistically about wealth to help us achieve the retirements we all want to have.

This approach is so important now due to combination of long-term trends and recent changes to pension and tax laws:

1. We’re living longer and few of us will enjoy final salary pension benefits.
2. 57% of over 55s recognise their pension is worth less than their property.
3. Since April 2015 we can now access more of our pension from age 55.
4. …but, recent changes to tax rules mean that it is arguably better to use property or other savings and investments first, saving pensions for later.
5. Many of us will be able to leave pensions to our next of kin, tax-free.

It is clear then that the way we access property wealth and pensions wealth, and the ways we use it are becoming ever more similar.

By Philip Harper  |  July 2020

How can I boost my state pension?

The new ‘flat-rate’ state pension was ushered in on 6 April 2016, affecting on the people reaching state pension age on or after 6 April 2016. This means millions of older people aren’t affected by it and have simply carried on receiving their state pension under the old system. While the Government’s aim has been to make the new system fairer for all and easier to understand, it can still be a minefield – and some people have lost out from the overhaul.

The official Retirement Age
You receive your state pension when you reach the Government’s official retirement age. What that is depends on when you were born. To reduce costs, the official retirement age is gradually being raised. It is increasing to 66 for men and women by April 2020, then to 67 by 2029, with a further rise to 68 expected between 2037 and 2039.

Buy ‘extra’ pension years
If you’ve got spare savings and can afford to be without the cash in the short term, it’s possible to replace some missing NI qualifying years. This could lead to a big increase in your basic state pension pay-out over your retirement. In a nutshell, you pay a one-off lump sum to buy a higher state pension sum. Assuming you live long enough, the extra cash you earn from a bigger weekly state pension could be worth £1,000s over a lifetime.

But before you boost your state pension, double-check it’s worthwhile because – as always with pensions – there are some tricky rules.  The key that defines whether it’s worth bothering is how many NI years you already have (remember that under the new state pension you need 35 qualifying years for a full rate pay-out). You can check online whether you have any gaps in your NI record by getting a state pension statement or calling the Government’s Future Pension Centre on 0845 3000 168 and they’ll send you a statement.

If you’re eligible, and you could benefit by boosting, buying extra years involves paying what are called ‘voluntary class 3 NI contributions’.  Those retiring after 6 April 2016 can buy up to 10 years’ contributions. The rate is £15 per missing week of NI contributions – £780 for a full year.

Is it worth it?
Buying a full extra year for £780 will boost your pension by £4.80 a week, equivalent to about £250 a year. So, if you buy one extra year, you’ll earn back what you paid in just over three years, which is an investment return very hard to find elsewhere!

By Philip Harper  |  July 2020

Ten lessons to teach your children about money

When it comes to teaching your children about money there are some lessons that can’t be taught in the classroom. During global lockdown, this may be a good opportunity for them to learn about managing their finances.

1.Budget to save
Today’s school-age children are facing a long wait to get on the property ladder and to retire.  We recommend getting them into the habit of saving and budgeting as early as possible, so they are prepared for these milestones.

2. You only spend it once
Children need to understand the value of money.  There are now apps and prepaid cards that can be used for purchases and monitored by parents.  This will gradually introduce them to an increasingly cashless society.

3. Needs vs wants
It is important to help children decide when to spend now and how to budget in later life.

4. Money is earned
Don’t give pocket money without requiring your child to do something for it.

5. Save to give
Children are naturally generous.  Being able to give some of their pocket money to charity may be an incentive for them to save more.

6. Paper vs plastic
Just because you can’t see the money when using a card, it doesn’t mean that it isn’t being spent.  Explain the difference between a credit and debit card and how the money in a current account is just like paper money.

7. Keep half, spend half
A good mantra is, “keep half, spend half.  This is something children can apply now, as they do not have the large outgoings adults may have.  If they carry this principle into adulthood, it will transform their life financially.

8. Avoid peer pressure
Stress the importance of making healthy choices with money and life in general.  Look at social channels and point out how things are manipulated, how ‘influencers’ are paid to sell products.

9. Compound interest
Described as the eighth wonder of the world by Albert Einstein.  It is important to teach children about the effects of compound interest.

10. Prepare for the unexpected
The latest virus pandemic has shown us all how important it is to have savings for a rainy day. Building on good financial health helps deal with all types of events both good and, not so good.

By Philip Harper  |  April 2020

Anyone who reads the papers knows that the world’s economies are going through a period of uncertainty. It’s natural at these times for some investors to get twitchy, which only serves to make
the situation even less predictable.

The truth is that share prices invariably rise and fall, but for the long-term investor, this shouldn’t need to be the primary concern. Historically, long-term performance tends to even things out and there are even good reasons to see opportunity where other investors are seeing only gloom.

The world of investing is overflowing with metaphors, adages and fables, so here are our top seven principles for keeping your head when all about you are losing theirs.

Investing can feel like a hazardous voyage particularly during turbulent times. This is when our horizon can veer towards the shorter term, we have selected three of our principles to focus on that are particularly relevant to current market conditions.

Stay invested: The perils of missing the best days
When markets are volatile, it is often tempting to exit the market or switch to cash in an attempt to reduce further expected losses. However, it is impossible to time these movements correctly as no-one has a crystal ball to predict future movement, so being out of the market for just a few days can have a devastating effect on returns. Using UK equities as an example, the chart (right) shows how missing just a few of the best days can have a devastating impact on returns.

Over the last 25 years, using the example of a £10,000 initial investment, an investor who stayed in the markets throughout the period could have a potential return of more than double that of an investor who missed the best 25 days.

Invest for the long-term: Our proposition rewards the patient investor
Wise investors know that investing is a long-term commitment. Historically, investors who have been able and willing to ride out the periods of decline in the markets have seen their investments recover. Investing with a long-term outlook and with long-term goals is the best way to reduce the impact of stock market fluctuations and see out periods of volatility. Taking the last 25 years, there have been many examples of short-term volatility but over the long term the trend is a rising one.

Steering a course towards a longer-term investment horizon will always require a steady hand on the tiller in the shorter term. These fundamental principles are a useful reminder of the strategies that will continue to benefit our clients.

Don’t just invest in cash: The eroding power of inflation
It is often tempting to see cash as a safe haven against all market volatility. However, recent years have seen higher rates of inflation and lower rates of interest on your cash. The pressure that inflation can place on your cash can be very debilitating and in the long run not being invested in the markets can be inherently riskier than being invested.

At just 2.5% inflation, an investor would lose nearly half of their purchasing power over 25 years. So, £10,000 today would only have the purchasing power of £5,310 in 25 years’ time.

Interest rates have always historically outstripped inflation. Investing in a standard interest-bearing bank account would have provided some protection against the ravages of inflation. However, looking forward interest rates are expected to stay below inflation.

By Philip Harper  |  March 2020