Retiring at 65 in the UK is no longer a certainty. For those in their 50’s, the state pension won’t kick in before the age of 67. However, relying on a state pension to fund your retirement may leave you in a slightly precarious position as it may not be enough to fund your lifestyle after retirement. To counteract this, many people supplement their state pension with a private pension or an investment programme.
If you wish to retire at an age of your choice and live a comfortable life, you need to start planning how you are going to finance your retirement as soon as possible. Looking at methods to enhance your pension is vital if you want to live your life well. The good news is, it’s not as difficult or challenging as you might think.
- Calculate What Your Retirement Will Cost?
- Start Saving
- Create A Budget
- Start A Side Income Stream
- Consider Investments
- Create A Rainy Day Fund
- Eliminate High-Interest Debts
- Be Consistent
- Start Today
- Get Financial Advice
1. Calculate What Your Retirement Will Cost?
It’s difficult to predict the future; no one knows how long they will live. However, when planning your retirement you will have to make some assumptions based on the average life expectancy. In the UK, the age is roughly 81, although there are online calculators that will give you more of an estimate based on various factors.
For the purpose of costs, it may be best to over estimate your life expectancy. Let’s assume your life expectancy is 81 and you would like to retire at 65; in this example, it is recommended your plan covers the cost of living for 20 years instead of 16, to give you a comfortable cushion.
The next step is to write a simple forecast of your living costs after retirement, factoring in inflation for each year. After you have calculated the basic costs, then add in the luxury factors that will make your life more pleasant. From these figures, you will be able to see how much money your retirement is going to cost.
Take note of this figure and divide it by the number of working years you have left. This is how much you will need to save per year, in order to retire when you want to.
It’s estimated that £27,000 a year for retired couples is an adequate figure to live on comfortably, rising to £42,000 for a more luxurious lifestyle. For those retiring in 2019 the state pension currently pays £13,437. This leaves a shortfall of approximately £12,500 so you will need to consider ways to fund this as your starting point.
Your own research will pinpoint how much extra you will require per year for the little luxuries in life. Also, if you plan to retire before the state pension kicks in, you will need a plan that covers the whole amount in the years leading up to state pension age.
2. Start Saving
Saving can be challenging when the day-to-day costs are escalating, but it’s important to consider your future as well as the present. It does not matter how little you can save, just start saving today. Even if you only save £5 per week, that is an extra £5 a week sitting in your bank for your future.
Obviously the younger you start saving, the better. Even if you don’t start saving until you are over 45, it can make a huge difference. However, if you are starting from scratch at this age, be prepared to make some sacrifices to be able to sufficiently fund your pension pot. It means losing some of your current disposable income to fund your quality of life in the future. A good rule of thumb is to take your age as your starting figure, halve it and put this amount as a percentage of your salary into your savings, although it does need to be affordable. You will also get some tax relief on the payments you make into your pension plan.
3. Create A Budget
If you are wondering where to find that little extra to start saving, there are always possible ways to find some extra money if you want it badly enough, such as having a holiday every second year instead of annually, making packed lunches instead of buying them,or buying second hand cars instead of leasing them. Most people spend more than they realise, especially with the luxury of online shopping and bank cards. Many items are bought on impulse and never used.
The first step to creating a budget is to keep a daily expenditure diary. Maintain it for a full month and you will be amazed at how much money trickles through your hands. For example, a daily take-out coffee could add up to £60 a month.
When you have recorded everything, look at ways to cut back on your spending. Consider the impulse buys and decide if they really are a necessity or not, which does require a strict level of honesty. Ask yourself if you can live without it before you buy it.
Now create a budget. Consider all the necessary outgoings such as your living overheads. Allow a budget for some fun in your life, such as nights out and also budget for birthday gifts, Christmas and an annual holiday if possible. These are all costs that occur annually, so divide the price by 12 and this will be your monthly budget.
Hopefully, after doing this you will observe a bigger difference between your income and your projected outgoings. The surplus cash can now be used for savings. Create a new direct debit and commit to saving this amount each month, so that it goes out of your account with no fuss. In this way, you will hardly notice it!
4. Start A Side Income Stream
If there is a shortfall between the amount you are saving and the amount you need to save to be able to retire when you choose, you need to look at ways to either make further cut-backs or create more income.
Trying to make some extra income is always a good option. There are many ways you can make more money, including selling all your unwanted items on eBay, getting crafty and selling on Etsy, or perhaps do some evening tutoring if you have a particular skill.
The important thing to remember is that this is an extra income stream and if you put all of it into your savings pot without being tempted to have that extra holiday, you will have more funds that are contributing to your pension. If possible this also has to be sustainable over a long period, so you need to budget the time factor into it.
5. Consider Investments
If you are happy to take a slight risk, then consider investments as well as saving. Most savings accounts offer a 2% return, whereas you could achieve a higher percentage return with a mixed investment strategy.
You could also consider investing in property, which has long been considered a reliable and stable investment. The most common method of investing in property is to follow the buy-to-let method, which should cover your day-to-day costs of owning the property including mortgage payments. You can then sell the property when you retire. At this point, you would have hopefully paid the majority of your mortgage and the property value may have grown, giving you access to a lump sum greater than that of your original investment.
Of course, there are many considerations to be taken into account before heading into property investment as opposed to a pension plan. Such as how you will fund the deposit, whether you can secure a buy-to-let mortgage or alternative funding, how you will fund the mortgage payments if you have a period without a tenant, the time needed to manage the property and understanding the legalities of being a landlord. However, it can be an enjoyable and profitable method of funding your pension.
6. Create A Rainy Day Fund
When something unexpected happens, it can eat into your savings. If your boiler fails or you need to replace your car suddenly, dipping into your retirement savings may be the only way to cope if you are not prepared.
Have a separate savings account just for these events. Do whatever it takes to put aside an appropriate amount in an emergency fund. Doing this gives you financial peace of mind and ensures your retirement savings are safe. A quarter of the adults in the UK admit to having no savings at all, with no plan for emergencies or retirement savings.
7. Eliminate High-Interest Debts
Saving is crucial for retirement but if you have existing debts with interest payments, deal with these first. Pay off all of your credit cards, store cards, catalogues, doorstep loans, etc as quickly as you can. Use the extra income you have generated either through clever budgeting or making extra money to initially pay off your debts as soon as possible. When the debts are clear, concentrate on using the income that you previously used to pay off your debts to increase your savings pot instead.
8. Be Consistent
Consistency is key in everything you do, whether it be a get fit plan or a work goal. It is also true when it comes to your retirement plan. Set a plan and stick to it, no matter what. This is far more effective than a grand gesture like hoping for an inheritance, or a lottery win. You can’t make plans against unknown outcomes but you can consistently pay into a retirement fund.
9. Start Today
Consistency is key in everything you do, whether it be a get fit plan or a work goal. It is also true when it comes to your retirement plan. Set a plan and stick to it, no matter what. This is far more effective than a grand gesture like hoping for an inheritance, or a lottery win. You can’t make plans against unknown outcomes but you can consistently pay into a retirement fund.
10. Get Financial Advice
Whatever method you decide on to help you save for retirement, consider taking some financial advice. Reading is a great method of learning, so start with some books on personal finance. For more detailed advice, seek the services of an impartial financial advisor.
Speaking to an advisor can pay dividends in the end. Financial advisors know the current state of the market at any given point and will discuss the best strategy for you, based on your individual needs. As an individual, it can be difficult to understand the advantages and disadvantages of different products and which is the best one for you. Whereas an advisor will have detailed knowledge of everything on offer. During discussions, they will ascertain what you require and will help match you up with the most beneficial plan based on personal circumstances, goals, current financial situation and whether you would prefer a low-risk or high-risk strategy.
The main takeaway message is to start planning for your pension as soon as you can, as the more you can invest the more comfortable a lifestyle you will be able to fund. However, it’s never too late to start. Begin with a clean slate by paying off existing debts first and then look at how you can viably achieve your retirement goals without putting yourself into debt.
Think outside the box and consider the different ways in which you can save, including a traditional pension plan or alternative investments such as property. Whatever you decide, seeking financial advice is recommended before embarking on any strategy.
