After the (more or less) steady market growth over the past five years, the recent volatility has come as a shock to many investors.
The economy is cyclical, and downturns are a feature of investing. We have to expect they will occur, just as we understand that they are usually followed by a recovery, and factor these into our plans. It’s impossible to predict the timings, but over a lifetime of investing, it’s reasonable to assume that short periods of volatility will be ironed out.
But what if you are planning on retiring this year? If your investments have been impacted, this might alter your plans. On the other hand, has working from home given you time to think about your plans and increased your desire to retire sooner?
The lead-up to retirement is the ideal time for a financial review, irrespective of world events.
Where Are You Today?
The first step in planning for your retirement is to work out the assets and income you will have available. You should include:
- Pensions, both money purchase and defined benefit. If you are fortunate enough to have a defined benefit pension, the recent volatility won’t have impacted the value.
- Cash in the bank – it often makes sense to withdraw this first, as it leaves other investments with more time to grow.
- Investments such as ISAs, shares, investment accounts and bonds. While pensions are the obvious funding source for retirement, it can be more tax-efficient to take income from a variety of sources.
- Any properties that will be sold or rented out.
- Your State Pension. You can find out how much you are due to receive at https://www.gov.uk/check-state-pension
- Any other income you receive, such as company dividends.
Where Would You Like to Be?
The next step is to consider how much you expect to spend in your retirement. This may vary over the years, but it helps to have an idea. You can start by thinking about the kind of lifestyle you would like – does it involve spending time in the garden and seeing family, or you do imagine a more luxurious way of life filled with travel and hobbies? Consider:
- Your basic everyday expenditure, including food and bills
- Less regular expenditure such as car purchases and household maintenance
- Discretionary expenditure, for example holidays and activities
- One-off expenditure, e.g. buying a caravan or adding an extension to your home.
How a Financial Plan Can Help
It’s fairly simple to work out how much you have, but how can you be sure that it’s enough? There are online tools available, or alternatively a few sums on a spreadsheet can help give you an idea.
But a comprehensive financial plan goes several steps beyond this to ensure you are placed in the best possible position for your retirement. It will take into account your current situation, goals, and objectives, and answer the many questions you may have about your future. For example:
- How much can you afford to spend each year?
- How much can you afford to give away?
- What level of return do you need on your investments, and how much risk do you need to take to achieve this?
Are your current investments suitable and competitively charged?
- Could your investments be more tax-efficient?
When the answers to these questions are known, a strategy can be created for your retirement plan. This should combine a suitable asset allocation with tax-efficiency and value for money to provide the best chance of achieving your retirement goals.
What Can You Do Next?
If you do find that you are not yet in a position to retire with your desired lifestyle, this is not the end of the conversation. You may simply need to make some adjustments, for example:
- Reduce your planned expenditure.
- Rather than increasing your spending every year with inflation, aim to review your expenditure periodically. You may find that you naturally spend less on some things anyway.
- Consider semi-retirement, working less hours if possible or perhaps a different job that allows you to phase into full retirement. If you can cover your expenditure during this time, this gives your invested funds more time to grow.
- Increase the risk level, and therefore the growth potential on some of your investments. This should only be considered if you have other funds you can draw on in the short-term. Higher risk investments are more volatile and may lose money if taken out too early.
- Downsize your home and invest some of the proceeds.
Of course, retirement is rarely a single event nowadays, as many people opt to reduce hours or switch to less demanding roles as they get older. Perhaps an adjustment to your work-life balance is a reasonable alternative to early retirement.
Once of the benefits of a financial plan is that it can help you to define your priorities. Once you know what you need to do to achieve early retirement, it should become clearer just how important this is to you.
The pandemic may have affected your invested funds, but you will probably also find that you are spending less on discretionary items. While this can even out on the financial side, you might also want to think about how you will spend your time if you were to retire now. If a world cruise or a lavish party are on your agenda for retirement, waiting until next year could bring a more satisfying end to your working life.
Please don’t hesitate to contact a member of the team if you would like to find out more about retirement planning.