Time flies by very quickly. Before you know it, you’ll be knocking on the door of retirement. Life is very different when you’re not going to work every day so it pays to be prepared.
If retirement is still a way off for you, you’ll probably only need to make sure you’re contributing to your pension fund. However, as time ticks by and you get closer to the time you want to stop working, it’s wise to have a robust plan.
Focus your plans around your retirement income, not forgetting to consider writing a will, drawing up a power of attorney, and looking at your options for funeral plans.
The goal of this post is to provide some tips for managing your retirement income.
Ask Yourself Some Questions to Help You Formulate Your Plan
You might be a little confused about where to start, but answering the following questions will help you form an outline for your retirement plan.
- What do I want to do when I retire? Perhaps you’ve got a bucket list of places you want to visit. Maybe there are some activities you’ve always been meaning to do but not had the time because you’ve been working.
- How much income will I need? What you want to do has a direct influence on how much income you’ll need. If you’re staying at home, you’ll need less money than if you’re planning overseas travel. Some hobbies are also more expensive than others.
- When will I start needing that income? The transition from work to retirement can be as flexible as you want. Many people prefer to take a phased approach. Having a plan allows you to have a clear idea of when you’ll need to start drawing money from your pension funds or savings.
- How long will my money need to last? Life expectancy is increasing. With the average male living until 84 and the average female living until 86, your pension fund could need to last for at least 20 years, possibly longer.
Work Out Where Your Money Will Come From
For most people, the majority of their retirement income will come from any pension arrangements they’ve made. This could take the form of a personal plan you’ve set up yourself or a company pension scheme run by your employer.
Check how much these pension arrangements are currently worth and get a projection of their worth when you retire.
You may also have additional income sources that need to be considered, for example:
- Savings and investments such as Investment Bonds, General Investment Accounts, and ISAs
- Other investments such as shares and stocks
- Property you can use to raise money or buy-to-let options
Check the Figures for Your State Pension
For the 2021/22 tax year, the new State Pension amount is £185.15 per week. This isn’t a massive amount but provides a useful, guaranteed income that increases in value each year.
You can check the details of your state pension, how much you’ll get, and when you’ll get it by visiting the government website.
Remember to Factor in Inflation
We’ve all been hoping that the days of high inflation are long gone, but predictions are that it could be due for an unwelcome comeback.
To protect yourself against the impact of inflation in retirement you should be flexible. Remember that your retirement income won’t be static and your outgoings are likely to vary year by year.
Reduce Your Tax Bill
It’s good financial practice to take steps to reduce your tax bill and even more important when you retire.
Remember the following simple facts and you can avoid having to pay too much tax when you don’t have to.
- You and your spouse have a Personal Allowance of £12,570 (2021/22). This means that between you, you can take more than £25,000 annual income tax-free.
- You are entitled to take 25% of your pension fund tax-free.
- You don’t pay any income tax on the money you take from your ISA savings
Other Commitments
You may have commitments that could impact your retirement finances. For example, you might want to help your grandchildren or children financially with school or university fees, wedding costs, or buying a house.
Investment Strategy
Investments carry different levels of risk. Choose high-risk investments and there is the potential for high investment returns but also a higher chance of sudden short-term losses.
It’s always best to seek financial advice because investing can be complicated and mistakes can prove costly.
Emergency Fund
It’s always best not to have all your investment eggs in one basket because the markets can be susceptible to unexpected fluctuations.
In the same vein, it’s also advisable to keep enough money in a secure, low-risk fund should you need to ride out any market crash.