Retirement might seem some way off, but It’s never too early to start planning – the earlier you start contributing to your pension pot, the earlier you can retire!
Early retirement planning, however, is easier said than done. Real life often gets in the way of your plans to start saving for later life. Other financial commitments – paying off student loans, getting on the property ladder, starting a family – tend to take over in your 20s and 30s.
Thankfully for you, we’ve put together this handy retirement guide to explain exactly how to plan for retirement, no matter what stage of life you’re currently at. We’ll highlight some of the things you should be considering at certain ages, and some top tips to get started with planning for retirement.
So, let’s find out how to plan for retirement…
Before we delve into how to plan for retirement, it’s important to know why it’s so important to do so.
Retirement planning has changed over the last couple of decades. Today, fewer people enjoy the guaranteed income that comes with a final salary pension, and you now have to wait longer to start drawing your State Pension.
This means, nowadays, having plenty of money in retirement is on your shoulders – so the better you plan for retirement, the better your retirement will likely be.
The good news is, there’s loads of advice you can get to help you understand what’s the best retirement plan for you.
This retirement guide will help you determine how to plan for retirement at different stages of your life.
For many 20-year-olds, retirement is the last thing on their minds. Perhaps you’ve just left university or are on the path to deciding exactly what career you want. You probably don’t have that much money and have other priorities than saving for 50 or so years down the line.
However, there are a few things you should know and consider when it comes to planning for retirement in your 20s:
What do you need to do?
When you reach your 30s, you often start to have different priorities when it comes to your finances, such as starting a family and buying a house. However, there are still things you need to know about saving for retirement in your 30s:
What do you need to do?
Once you reach your 40s, it’s more likely that you’ll have other significant financial commitments out of the way. So, it’s time to start focusing more closely on how to save for retirement.
What do you need to do?
As retirement draws closer, you need to start properly thinking about how much money you’ll need to enjoy a comfortable retirement. There are a number of things you need to consider when planning for retirement in your 50s:
What do you need to do?
At this point, you’re quickly approaching state pension age, and you need to think about when you’ll want to stop working for good. It’s important to properly plan for your retirement by considering all your pension options. Here’s what you need to know:
What do you need to do?
Are you asking yourself: “How much pension do I need to retire?”. Everyone has a different idea of what constitutes a good retirement income, but one thing is certain – relying on the State Pension alone won’t allow you to live comfortably in later life. In fact, even the average UK pension pot might not be enough.
According to the Pensions and Lifetime Savings Association, a single pensioner would need a pension income of £10,200 to live a “minimum level” lifestyle in retirement. This is already slightly more than the current full new State Pension of just over £9,339 per year.
So, what is the average retirement income? After a lifetime of saving, the average UK pension pot stands at £61,897. With current annuity rates, this would buy you an average retirement income of only around £3,000 extra per year from the age of 67. This, added to the full State Pension, makes just over £12,000 a year – just enough for a basic retirement lifestyle.
If you’re concerned about not having enough in your pension pot, it’s essential that you understand how to plan for retirement and that you start planning as early as possible.
To help you throughout the process of planning for your retirement, we’ve put together this helpful retirement planning checklist. You can use this four-step checklist to ensure you’ve covered everything you need to do leading up to retirement age.
It’s likely that you’ll need to adapt to a different pattern of income and spending when you retire. This is because you’re likely to have less money to live on.
To make sure you’re prepared for these changes, and to help you plan ahead, it’s a good idea to set a budget. Making a retirement budget can help you break down your potential future spending into two categories:
Essential expenditure – money you need to cover your basic living needs e.g. housing costs, utility bills, groceries and day-to-day travel.
Non-essential expenditure – money for things you like to do day-to-day e.g. eating out, holidays and leisure.
With a clear view of your spending needs in retirement, you’ll have a better idea of the income you’re likely to have to spend.
Next, you should work out how much you’re likely to have in retirement. You should aim to do this at least two years prior to retirement.
To do this, you will need to do the following:
Depending on the type of pension funds you have, you might need to think about how you’re going to draw your money.
it will typically begin paying you a guaranteed income from your normal retirement age under the scheme (usually 60 or 65).
The amount you get will depend on your salary and how long you worked for the company. A lump sum might be paid as well as your pension, or you might have to give up some income to take a lump sum.
If you have a defined contribution pension, you’ll have built up a pot of money that you can normally begin drawing from the age of 55.
There are a number of ways you can use the money from a defined contribution pension. Different options can provide different amounts of income.
When considering the different options available, it can help to think back to your estimated retirement income needs. For instance, it generally makes sense to ensure all your essential income needs are covered by guaranteed income.
You might also have other sources of income that you can use in retirement, aside from your pensions. This income could come from:
So, now you know how much income you might need, how much you might get and when you can start drawing your pension in retirement, you can properly start planning.
When it comes to how to plan for retirement, you should ask yourself the following questions:
So, there you have it – how to plan for retirement.
If you’ve set up a private pension to start saving for later life, remember to change your address with the pension provider when moving home. Take a look at some of our pension change of address articles to find out how:
Take the hassle and stress out of your move and update your address with hundreds of companies