 The Classic guide to retirement
It is important to address retirement issues
early and if you find you have not saved enough you must optimize
your investments to provide a decent lifestyle during retirement; and this
means having a retirement plan.
So, what is a retirement plan?
It is a detailed plan of action to facilitate your withdrawal from your
occupation or from active working life. Expressing it crudely, once your pay
cheques cease arriving, you need a big enough pot of money still to be able
to do the things you want. There are several questions arising from this:
- When are your pay cheques likely to cease?
- What is it that you want to have and be able to do in retirement?
- What would be enough money for you to achieve this?
- How are you going to go about getting this pot of money together?
- Are there any other issues?
With all this in mind, we can move on to other questions. When do you
expect to retire
Start by making a realistic assessment of when your pay cheques are
likely to cease. Take into account your hopes and aspirations, but also
consider the normal retirement age for the type of work that you do. If
you're a ballet dancer or footballer, then you're likely to come up with a
much lower age than if you're, say, an EU Functionary or a civil servant.
Consider a range of ages. Pick a date by which you'd really like to be in
a position to retire and a date beyond which you really cannot face
working. Somewhere near the middle of this range should be a reasonable
target. What do you want to have and be able to do in retirement?
The first thing to consider is your current standard of living? But then
you need to think to yourself, especially if you're relatively young, that
this will change over time. What you are aiming to do is to take the same
standard of living that you had just prior to retirement and maintain that.
The answer is to aim for a retirement which maintains the standard of
living that you've got used to during your (and/or your partner's) working
life for as long as both of you can reasonably expect to live. It would
also be miserable to spend your later years having to cut back on the
luxuries that you had got used to, but there is no point in saving extra
to give yourself a higher standard of living in retirement since, apart
from anything else, you may not make it that far. So, it's a question of
looking realistically at what you expect to be earning at that stage. This
leads to What would be enough money for you to achieve this?
We established that our aim should be to maintain our standard of living
in retirement. But what exactly do we mean by that? Maintaining your
standard of living doesn't necessarily mean having precisely the same
income. It means having the same disposable income. So, assuming that
you've paid off your mortgage and your kids (if any) have left home,
you'll need a lot less income to keep yourself comfortable than you did at
some stages of your working life. It might also be that you plan to move
to somewhere where things are a bit cheaper. It's also true that you
might have additional expenses in retirement. You will have more time on
your hands to fill with your hobbies. It's a wonderful thought, but it
might cost a bit. How are you going to get this pot of money together?
You probably have some expectations of pension from the state or from
past or present employers. If they are adequate, then you can be more
relaxed. If they are not, then your objective clearly has to be to
supplement your defective existing pension arrangements with sufficient
extra money to compensate for any shortfall in those arrangements. Are
there any other issues?
There are several: What about growth in average earnings?
Of course you have to make a realistic assumption as to how your earnings
will evolve and what they will be when you retire. What rate of return
can I realistically achieve from my investments?
By far the most important information needed by you to effectively manage
your money is the rate of return you can expect from your investments.
Unfortunately this boils down to making realistic assumptions and as every
one knows past performance is not a reliable guide for the future. What
about tax?
Tax cannot be ignored. In fact, tax is one of the main factors in
deciding what type of vehicle you should use for your savings. There might
be tax to pay on your eventual retirement income and there might be tax to
pay on your savings. You need to consider the rules of the country where
you are (or may become) resident and have an awareness of the tax treaties
of each. What other financial sacrifices should I make?
You still need to think about your short-term financial situation and
things like life insurance to protect the family in the meantime, as well as
medical insurance and loss of income. How important is the retirement
location?
Do not under-rate this.
Consider the availability of good accessible medical care, proximity to
necessary amenities and the like. Remember, it’s a moving target
Providing for your retirement is a matter of striking a balance between a
number of factors, but those factors are constantly evolving. You can't
simply settle on a plan, pat yourself on the back and forget about it. For
example:-
- What if I get made redundant in my early fifties and can't find
another job?
- What if I have a new partner, or a late surge of fertility with my
present partner leading to more children, and need to take career
breaks?
- What if my investments don't grow as quickly as I'd expected?
If you are able to answer a few of the "what if" questions ahead of
events, then you'll be in a far better position to deal with things if the
"what ifs" actually come to pass.
How likely are these things to happen?
A good retirement plan must be flexible enough to cope with contingencies,
if they happen, ahead of events. So, at every stage of the planning process,
you need to be thinking not only about what you expect to happen, but how
likely it is that things will work out differently and by how much. A
retirement plan has to be monitored and tweaked from time to time. What a
retirement plan is not
A retirement plan should definitely not be considered a cure-all for your
financial situation. Apart from anything else, paying close attention to
your short-term financial situation - staying out of debt and living within
your means - is what enables you to save for retirement in the first place.
You probably can't have everything
Providing for your retirement is a balance between a number of things and
you've got to see it this way from the start. The earlier you retire, then
the less you will be able to save to live on in retirement. It makes no
sense to say "I'd like to retire as early as possible with as big a pot of
money as possible", because the one defeats the other. One less year of
earning means one more year of retirement income to finance so it costs you
two years. For an example of the benefits of saving early see the guide to
saving plans. If you would like to discuss a retirement plan for you
particular circumstances, then please
contact us.
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