Getting your finances in order is probably the toughest part of retirement planning. After all, you don't know what the future holds. But the more you understand about your financial situation now - and the kind of retirement you want to have - the easier it is to plot a course for success.
Budgeting for retirement
Budgeting for your retirement is an essential part of the retirement planning process. It's where you work out where you want to be and figure out how to get there. Let's take it step by step:
When do you want to retire?
First, when do you want to retire? You can retire when you like. There's no minimum or maximum age.
It's up to you. Maybe you want to quit working as soon as possible, or perhaps you like working and want to carry on for many more years.
The average person tends to retire when they reach the state pension age (currently 66, but due to rise gradually, reaching 68 by 2039).
You can access your personal pension when you reach 55 (due to rise to 57 in 2028).
How much money do you want?
Next, let's look at how much money you need coming in after you hit retirement age. Depending on your age, this can be very hard to predict as you don't know what the cost of living will be 20-30 years from now.
Consider the lifestyle you want after your retirement date. Do you see yourself travelling the world or at home with your family? Will you drive the latest sports car or be happy with a hatchback?
Think also about the financial obligations you expect when you retire, like your weekly shop, council tax and other expenses. Will you still need to pay your mortgage or other outstanding debt?
Here's a good rule of thumb from MoneyHelper:
- Most people say they would like to have 60% of their current annual salary as their yearly retirement income to maintain a good lifestyle.
So, if you're currently earning £50,000 per year, you could budget to set up an income of £30,000 per year for your retirement.
This figure will change due to inflation, as well as changes in your income and lifestyle choices, but it's a good place to start.
How much will you have?
Before you retire, you'll hopefully have paid into one or more private pensions to provide for you in retirement. (More about this later) Your statements will give you a picture of how much will be there when you want to retire.
You'll also be able to access money through the state pension. Its value is currently around £11,500 per year.
On top of that, you could have significant savings in your bank account or other investments working for you. Perhaps you'll have proceeds from a house sale, or an inheritance coming your way.
If you can get a picture of what you'll have just before your desired retirement age, you'll know if there's a shortfall between what you have and what you want.
There are numerous retirement calculators available online to help you determine these figures, including this one from Moneyhelper.
Reaching the figure
When you have a picture of when you want to retire (and therefore, a good idea of how many years you'll be retired), how much money you need as income each year, and the assets you have just before you retire, you can start to plan a budget.
For most people, the chief source of income in retirement will be the pension pot they are building up now.
Pensions
There are two types of pension you need to know about:
- State pension - A universal benefit provided by the government to everyone over a specific age
- Personal pension - A pension you have paid for yourself from the money you have earned, also including contributions from your employer
Let's look at both of these:
State pension
The state pension is a benefit available to everyone over pension age, regardless of their income. The only stipulation is that they have paid National Insurance contributions for enough years previously.
Since 2020, the state pension age for men and women has been 66. However, it's slated to increase to:
- 67 by 2029
- 68 by 2037-39
The current amount of state pension is around £11,500 per year, but it tends to increase annually by the rate of inflation to maintain its buying power.
You don't have to claim your state pension when you reach the set age. In fact, you can defer your pension and boost the amount you'll eventually receive. Currently, if you defer it for a year, you eventually receive your full pension plus an extra 5.8%.
Personal pension
A personal pension - or defined contribution pension - builds up as you work with contributions from yourself and your employer. Companies in the UK are required by law to enrol their eligible employees in workplace pension schemes.
This pot of money is then invested in a fund by your pensions provider, so when you retire, it will be worth more than the amount you and your employer put in. That is, if your pension provider have made good investment choices.
When you hit retirement age, you have many options for your pension:
- Purchase an annuity - Creates a guaranteed income for life
- Drawdown - Delivers a flexible income for your retirement
- Take all or part of it as a lump sum - and do as you wish with it
You can also access your personal pension when you reach 55 (rising to 58 in 2028) if you want to get your hands on the money before you retire.
Every year, your pension company will send you a statement to let you know how your pot is growing. However, many people, particularly if they've changed companies many times during their career, find they have more pensions than they can keep track of. Make sure you have a clear understanding of where your pensions are to avoid 'lost pots' of money.
When you take your personal pension, you may have to deal with taxes, fees to the pension company and other personal finance matters. Talking to a specialist financial advisor about your pension is always advisable.
Summing up
Once you've done all your sums, you can feel more confident in your retirement plan. And the earlier you do it, the easier it is to create the retirement you want.
But of course, there's more to retirement planning than money.
Part of your retirement plan should include thinking about where you are going to live. Here are four ideas to consider:
1. Staying where you are
If you love your current home and you believe you can afford to live there without your income from work, why not stay there? No one says you have to move home when you stop working. If you've already paid off your mortgage, this could certainly be possible.
However, before you make a decision, you should go through your budget and check you can meet all the outgoings, such as your council tax and energy bills. You should also consider any future maintenance and repair costs.
Many people in this position find it makes more sense - for their finances and their lifestyle - to downsize.
2. Downsizing
Often, when people approach retirement age, they're in the family home they've been in for many years (or decades), but their children have flown the nest and they're rattling around in a house that's far too big. It's also a burden on your finances - and takes ages to clean.
That's when it's time to think about downsizing. You could sell your big family home (probably for a decent profit if you've had it a long time) and buy somewhere that's more the right size for you.
You can plough that money into your retirement savings pot, easing your financial situation for the future. You'll reduce expenses like council tax and energy bills as your home is smaller. You'll also spend less time cleaning and maintaining your new home.
3. Moving to a new area
Before retirement, you may have been tied to your area due to your work or your children's schools, for example. However, once you're retired, you're free from those ties. It may be time to make that big move you've always dreamed about, such as:
- Abroad - For example, many people retire to Spain or Greece where the weather is better and the pace of life is slower
- Somewhere more affordable - Some retired people decide to save money by moving to an area where the cost of living is lower (e.g. moving out of London)
- Being near family - Other retired people move home to be nearer their loved ones, such as their children or elderly parents
4. Retirement living
Finally, you could move to a retirement village. Many retired people love retirement living as they join a ready-made community of people their age. Food is often included in the service charges, while if you need specialist care as you get older, this can also be arranged.
No place like home
You have several living options available when you retire. Make sure you consider them all as you formulate your retirement plan.
However, there's one thing that's even more important to consider when you start retirement planning: your health.
Maintaining your physical and mental health is key to a successful retirement. It's something you should understand as you approach retirement - and prepare for.
Physical health
You won't have a happy retirement if you're sick or in pain. When you start your retirement, why not go for a free NHS health check? Get assessed for conditions that can spoil your retirement (heart disease, diabetes, dementia) and if anything comes up, you've hopefully caught it early enough to do something about it.
Next, make time to exercise regularly. You don't have to suddenly become a marathon runner, but if you were an active person before you retired, it would be a shame to let it slip. Even something like a daily walk can make all the difference.
Finally, plan to eat well throughout your retirement. This can be tricky as your eating routine may have been dictated by your working routine before retirement. However, don't slip into bad ways (excessive snacking, fast food) and focus on healthy eating.
Mental health
Often when people retire, they find it mentally challenging. They used to have a working routine that gave them a purpose, but suddenly it's gone. Anticipate that you may feel this way and take steps to remedy it:
- Retire gradually - Cut down your working hours as you get nearer to retirement, rather than stopping work in one go
- Keep your mind active - Do something every day that keeps your brain ticking over. Whether it's quizzes, puzzles, courses, learning a language or musical instrument, or anything else, it's all beneficial
- Move on - Try not to dwell on the past. Accept that your working life has finished and it's time for the next chapter of your life. Make it a good one
The short answer to when you should start your retirement planning is... now. It's never too early to start getting plans in place for when you're no longer working. The earlier you start, the better your plans will be.
Throughout your journey to retirement, there are milestones you hit that may be relevant, such as the ability to start accessing your person pension at 55 (rising to 57 in 2028).
Assuming you have a retirement date in mind, here's a schedule you can follow to ensure you hit your retirement goals.
10 years before you retire
- Determine your retirement goals
- Start a personal pension (if you don't have one already)
- Ensure your employer is contributing to your pension
- Start saving for retirement
- Cut back on spending
5 years before you retire
- Check you're on course to hit your retirement goals. If you're not, make more changes
- Increase your pension contributions (from yourself and your employer)
- Consider what you'll do with your pension when you retire (e.g. lump sum, drawdown)
- If you have several pensions accrued during your career, ensure you have all their details. Track down any 'lost pots'
- Start budgeting for retirement
When you retire
- Create yearly and monthly budgets - and stick to them
- Monitor your pension pots
- Be tax efficient with extra income (e.g. house sales)
- See what your options are in relation to continuing health insurance after leaving a job
All these tasks require some work and knowledge. It's always advisable to consult a financial advisor before you make any big decisions.
Finally, here are our seven tips for creating the most enjoyable and retirement possible.
1. Sort out your finances
It can be tough to adjust to life without your working income. Spend as much time as you can planning how you'll do it.
The earlier you start planning, the longer you can spend ensuring you hit your goals. You may find you have to start saving, cutting back on expense, tracking down lost pensions and much more, so give yourself as much time as possible.
At the same time, research the benefits you may be entitled to, such as state pension, pension credits and travel passes.
2. Look after yourself
Just because you've retired, it's no excuse to let your body and mind deteriorate, especially if you were an active person when you were working.
Make sure you take regular exercise. Even something as simple as walking to the shops every day can make a big difference. You should also make a resolution to eat healthily too.
Do whatever you can to keep your mind ticking over. Puzzles and quiz shows are popular, but why not go a step further and start learning a musical instrument or a new language?
3. Do things you enjoy
Now you're retired, you have more time on your hands than ever before. What are you going to do with it?
There's never been a better time to try new hobbies, visit new places and meet new people. If there's something you've always wanted to do, now's your chance. On the other hand, you also have more time to do the things you've always loved.
If you're not sure where to start, try looking locally. Investigate groups for retired people in your area.
4. Make new friends (and keep your old ones)
Going from a job where you see people every day to retirement can make you feel lonely sometimes. That's understandable. However, there will be lots of people feeling the same way you do. Try to put yourself in positions where you'll meet new people. Joining groups and trying new hobbies (see tip 3) is a great way to do this.
On the other hand, don't lose touch with your old work friends. Just because you don't work together anymore doesn't mean you can't still get together. Arrange times to catch up and tell them what you've been up to.
5. Travel
There must be some places you've always wanted to visit. Now you've got time (and hopefully the finances) to make those dreams come true. Get ready to start ticking things off your 'bucket list'.
Not every trip has to be a huge expedition, however. Just a simple weekend away or day trip can break up the routine and give you a new perspective on retired life.
6. Give back
Many people use their retirement time to give something back. They volunteer in their local community, raise money for charity, get involved in local groups - and much more.
There are lots of groups and charities that would welcome your efforts, so don't be shy. The sense of reward you get when you do good work makes it all worthwhile.
7. Stick to the plan
You spent a lot of time and effort retirement planning. You made a great plan which should set you up for a long and happy retirement. Don't let it all fall apart when theory becomes reality.
From a financial standpoint, keep to the budgets you set yourself. Don't overspend and regret it later.
Don't neglect your health and wellbeing either. You can't enjoy your retirement if you're sick or in pain.
But most importantly, enjoy yourself. Retirement is a stage of life we all encounter. You may as well have fun while you're there.
