Retirement Guide: How to Plan for Retirement

Everything You Need to Know About Planning for Retirement

How to Plan for Retirement UK

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…

Why Do I Need 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.

How Do I Plan for My Retirement?

Retirement Planning in Your 20s

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:

– You’ll automatically be enrolled into a pension by the company you work for
– You’re required to pay at least 5% of your total salary into this pension
– You can opt out – but it’s not wise to do so

What do you need to do?

– Join your company pension scheme
– Sort out any debts, including clearing your student overdraft
– If you’re self-employed, set up a personal pension or Lifetime ISA

Retirement Planning in Your 30s

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:

– Having a baby won’t affect your National Insurance contributions
– You need to start focusing your attention on building up your pension pot
– If you’ve switched jobs, your old pensions will stay with your old employer

What do you need to do?

– Put away as much money as possible – remember you can add more than your employer requires you to
– Keep saving for retirement despite other priorities (e.g. wedding, home, children)
– Put your pension savings in high-growth investments

Retirement Planning in Your 40s

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.

– Some people in this age group might have a final salary pension, which pays a guaranteed income at retirement
– This could form a solid foundation of your pension income, so you should work out how much you’ll need to have a comfortable retirement
– At this point in your life, you have around 20 years before you reach retirement age

What do you need to do?

– Check your state pension forecast to see if you’re on track for state benefits
– Assess the current size of your pension pot and find out how they money is being invested
– Make sure you update old pension schemes with new contact details
– Consider increasing your pension contributions (take advantage of pay rises and bonuses)
– Consider opening a Self Invested Personal Pension (SIPP)

Retirement Planning in Your 50s

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:

– The State Pension age is increasing
– You can access personal pensions from the age of 55 – but this has consequences
– Company schemes will start investing your pension in less risky investments, so growth might be lower
– You can use some of your pension savings to pay for professional pensions advice

What do you need to do?

– Start thinking about when you might want to retire
– Get a State Pension forecast
– Increase contributions of your earnings will allow
– Consider the need to support grown-up children

Retirement Planning in Your 60s

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:

– The state pension age is currently 66
– You don’t have to buy annuity with your savings if you don’t want to
– You pay tax on pension income

What do you need to do?

– Make sure all your debts are paid off
– Consider when you want to stop working
– Top up your state pension
– Consider all your pension options

What is a Good Retirement Income?

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.

Planning for Retirement Checklist

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.

Step 1: Work out how much retirement income you might need

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.

Step 2: Work out your likely retirement income

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:

– Get a State Pension statement – this will give an estimate of how much State Pension you will get. This is based on your National Insurance contributions so far.
– Find out how much you could get from any defined benefit pension – ask your pension provider for a retirement quote.
– Find out how much you have in your defined contribution pension pot – you should be sent a statement annually showing how much is in your pot.
– Add up the savings and investments you could use for retirement – besides a pension, you might have other savings or investments you could use to boost your retirement income.
– Trace any lost pensions – if you’ve lost track of any old pensions, find out how you can recover them.

Step 3: Assess your income options

Depending on the type of pension funds you have, you might need to think about how you’re going to draw your money.

Defined Benefit Pensions

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.

Defined Contribution Pensions

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.

Other Incomes Sources

You might also have other sources of income that you can use in retirement, aside from your pensions. This income could come from:

Part-time work
Pension pot you’ve invested in
Property
Your home

Step 4: Check your position and make a retirement plan

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:

– What age do you want to retire?
– How do you want to retire?
– Will you have any gaps in your income?
– Will you have any debts that you haven’t paid?
– Will there be any extra costs involved?

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: