The top ten ways to plan for retirement

WHEN final salary schemes were plentiful and the workforce was static, the question of “when will I retire?” never cropped up.

But with final salary schemes closing down, pension incomes under pressure and retirees living longer than ever before, knowing when you’re going to retire and how you’re going to fund it is a luxury. John Mortimer, director of Shepherd & Wedderburn Financial, offers a few tips to help you take back that control.

1. Create a budget

Do this in two stages. Look at regular expenses such as bills, shopping and leisure activities. Build in repeatable expenditure which is on a less frequent basis, such as the cost to change your car every five or six years. Check when debts will be cleared and, if possible, consider clearing them before you retire. This will release additional savings to put towards your retirement funding.

2. Be adaptable

Once you have your budget, consider how this will change in retirement. You may have university fees still to pay for or you may wish to help your children to get on the property ladder, so consider these points if they apply. You will have more leisure time available so take into account how you might spend this time and change your expenditure accordingly. You may decide to take more short breaks for example. Remember that expenses such as savings or pension contributions are not likely to apply in retirement, thereby increasing your spendable income.

3. Are you doing enough?

Look at where and how much you are saving at the moment. Could you be saving more? Are you using your cash individual savings account (Isa) allowances? Have you considered stocks and shares Isas? These can often complement pension savings when you start taking income in retirement because the Isa income is tax-free. If you are a higher rate tax payer, are you claiming your additional income tax relief on your pension contributions?

4. Be savvy

Consider your income tax position before and after retirement. Remember if you have a partner you can use both of your income tax allowances. It can make a difference to your household income if savings are allocated to the lower or non taxpayer. Remember that your pensions and savings income does not suffer national insurance deductions that applied to your employed or self-employed earnings. Always look at your income after tax has been deducted when comparing before and after retirement figures.

5. Check your company pension

When is it due to provide your pension benefits? Are there penalties for taking the benefits early? Are there advantages in taking it later? If looking at a list of projections, look at the lower ones – it is better to have a pleasant surprise than a nasty one.

6. Get a forecast

Find out how much you are due from your state pension and when it will be paid. Make sure it reflects your understanding of the number of years that you have worked and include this pension figure in your budget, even though it may become payable after you have actually retired.

7. Make it last

Can you make simple cost savings now that over time will help you retire either earlier or keep you on track for your preferred retirement date? Now is a good time to start – check your car insurance and building insurance – there are plenty of comparison sites if you want to do this yourself. Can you afford to take some longer term investment risks rather than depositing money in a bank account? This could help reduce the effects of inflation in the future.

8. Think about living costs

When you have an idea of your income in retirement, do not forget about inflation! You could be retired for 30 years or more. The effects of inflation basically increases the amount of money required to cover your expenditure. Expenses will double in 20 years time at an inflation rate of only 3.6 per cent a year. At 4.8 per cent a year they double every 15 years. The inflation rate can often be higher in retirement. This is due to more money being required for heating, leisure and travel.

9. Review your financial planning

This should be done at least every year to make sure you are on track for your preferred retirement date. Regular reviews however should allow you to regain control of when you can actually retire.

10. Mapping it out

Cashflow modelling or financial mapping is a good way to do all the above. Some advisers now offer this service and it not only allows you to map out your future finances in front of you, but it can let you know when you can afford to retire. It can also show you how much additional savings you need to allocate now if you want to retire earlier.

By adopting this type of regular review strategy the balance of who is in charge of when you retire will swing back in your favour again.