Drewberry™ provide pensions, investment and insurance advice for Money to the Masses readers throughout the UK.

 

7 Steps to Help Get You Retirement Ready

Whether you’re planning to retire soon or in 5, 10 or even 20 years from now, it’s never too early to start planning. It takes a long time to build up the assets needed to retire comfortably, with the lifestyle you really want. For those who start planning early, time is your best friend, but for those that leave it late, it can be your worst enemy.

More often than not, when we first meet clients their assets are, quite frankly, all over the place. They have numerous pensions, ISAs, savings accounts etc and generally only have a rough idea how much they’re worth, let alone how well they’re helping to achieve their goals.

Once a plan is in place, with a clear strategy, clients feel far more confident about reaching their life goals and achieving the lifestyle they want.

Neil Adams DipPFS
Financial Planner at Drewberry

 

Why It’s Never Too Early to Get Ready for Retirement

To get your finances shipshape and retirement ready, Drewberry has set out some steps below to help you plan for a more prosperous future. It’s never too early to start getting your financial house in order – in fact, the sooner the better!

The sooner you start planning, there more chance there is of achieving your desired lifestyle when you no longer want to work so hard.

Very helpful, advice was clear and there was not pressure at any stage to commit to purchasing a policy. Also the advice was tailored to my budget.

Linda Ashford
12/05/2018

How to Plan for Retirement

1. Define your Desired Lifestyle and its Associated Outgoings

First things first, the place to start any plan is with clearly defined goals, setting out exactly what you want for you and your family’s future. To help, these are some of the key questions we ask new clients during our discovery meeting:

  • When would you ideally like to stop working so hard?
  • When you stop working so hard, what would you like to do? What are your passions?
  • Where would you ideally like to live?
  • Do you have any big goals of dreams for retirement?
  • Is there anyone in your family you’d like to help financially?

Once you’ve set out your desired lifestyle, the next step is map out the future expenditure needed to achieve it. In addition to day to day living expenses, also consider the bigger ticket items, which could include the purchase of a holiday home, a trip of a lifetime upon retirement or the deposit for a child or grandchild’s first home. This is expenditure that would be met from your various savings, investments and pensions.

2. What Are My Current Assets Worth?

Once you’ve mapped out your likely future expenditure to facilitate your desired lifestyle and goals, the next step is to look at the assets available to meet that future expenditure.

To start with, you’ll need to obtain a current valuation for each of your existing savings plans, pensions, ISAs, buy-to-lets etc. This gives you the value of your current resources that can be used or built upon to fund your goals.

Part of the process should include going back through your working history to look for any old pensions you’ve lost track of. It’s very common to come across clients who have lost track of company pensions which can turn out to be worth a sizeable amount.

This exercise is crucial, but it can take a little bit of time to contact each provider for plan details and a valuation. Some providers are more helpful than others! Fortunately, we take care of this process for our clients.

Read Steven’s Story…

Steven came to us with eight different pensions and little idea of what this meant for his retirement.

We put a plan in place to put him in control of his finances. Consolidating his existing arrangements Steven was able to align what he wanted to do in retirement with his current provisions and now has a clear plan in place to achieve his retirement goals.

3. What is My Likely Net Worth at Retirement?

Once you have current valuations for each asset type, the next step is to forecast your current asset values forward to determine what they will likely be worth at your desired retirement age. This will require you to make assumptions about likely future returns for each asset type.

In practise this can be fairly complex, so you might want to appoint an adviser to help you. Alternatively, you could obtain forecasts from the research undertaken by an investment house, which often publish their research online. For our clients, we employ a leading consultancy to obtain most of our long-run forecasts, which we use in conjunction with our financial forecasting software.

It’s important to remember that any forecast is essentially a (research-based) guess that may turn out to be wrong, so it’s usually best to be conservative when forecasting forward.

If there’s a gap between your projected assets at retirement and what you think you’ll need to retire comfortably, now is the time to think about how to make up the shortfall. If possible, this will likely mean saving more, in the most tax efficient way.

When forecasting forward, don’t forget to factor in additional contributions you plan to make and how those contributions are likely to grow over the coming years.

To get a rough idea of how much your pension might be worth come retirement, you can use our basic Pension Pot Calculator to help.

Mark Williams
Financial Planner at Drewberry

4. How Will I Draw an Income in Retirement?

Now you know how much your assets will be worth at retirement it’s time to work out how you would turn those assets into a retirement income.

Some assets will be readily available to spend, such as cash in the bank, savings accounts and income from the State Pension or a defined benefit pension. Other investments you may need to sell down to turn into cash, such as with stocks and shares ISAs and defined contribution pensions.

With defined contribution (money purchase) pensions, which usually represents the largest asset we have to fund retirement, there are three main ways to turn those pensions into income:

At Drewberry, we’re dedicated to making retirement planning as simple as possible. That’s why we’ve built calculators, so you can see how much income you could have in retirement depending on which of the above options you choose. Although simple tools, our Annuity Rate Calculator and Drawdown Calculator should help to aid your thinking.

Jonathan Cooper DipPFS
Senior Paraplanner at Drewberry

When deciding how to draw your income in retirement, it’s vital to consider the following:

  • Ensure you can map your ability to draw funds to meet your expected future expenses (thus providing the money to fund your life goals when you need it). You can see a worked example of this in the ‘Financial Forecasting’ section below.
  • Structure your withdrawals in the most tax-efficient way (different assets have different tax rules and you need to spend time planning which assets should called upon when).

5. Could My Retirement Savings Run Out?

Income drawdown allows you to keep your pension money invested, allowing for potential investment growth and withdrawals as and when you need them. However, keeping your pension pot invested in this way does run the risk that your retirement savings might run out (as opposed to using the money to buy an annuity where you have a guaranteed income for life).

Thus, if you’re considering drawdown, it’s essential you calculate how long your pension will last based on your monthly income needs. Our basic Income Drawdown Calculator can help with this.

  • When does the money run out?
  • How does this compare with your life expectancy?
  • Is there a shortfall? If so, we provide some ideas to help in Step 7.

It’s important to bear in mind that we are now living far longer, and although hard to envisage, many of us will live well into our 80s. To get a rough idea of your life expectancy you can use this ONS calculator.

6. What Happens if the Stock Market Falters?

When it comes to investing, stock market volatility comes with the territory. That’s why every pension investor should conduct scenario analysis to determine if their plains are resilient to stock market fluctuations.

When doing this, it’s essential to have a clear understanding of the level of risk being taken with your investment portfolio. If there is a big market correction, in any one year you could see a fall of around 5-10% with lower risk portfolios and 25-30% with higher risk portfolios (possibly even more without sufficient diversification).

  • If there is a correction in the markets the year before you plan to retire which resulted in your portfolio falling by 20%, say, would that throw your plans out the window?
  • Once retired, could a fall of that magnitude scupper your wishes for comfortable later years, or even result in you running out of money?
ben sassoon financial planner at drewberry

Remember, to make up a loss of 20% in any one year, your portfolio would need to rise by 25%. If you’re making withdrawals at the time it compounds the loss further, meaning the rise needed to recover the loss is even greater.

Ben Sassoon Chartered MCSI
Financial Planner at Drewberry

One of the most common mistakes we see with private investors is trying to target the highest return possible and taking very high levels of risk in the process.

It is often more prudent to work out what return is actually needed to achieve your goals. If you only need an annual return of say, 3%, is there any point taking the risk needed to achieve 6%?

Both when you’re approaching your retirement and during your retirement it is even more crucial to have a solid grip on the amount of risk being taken.

These days there are funds which have been designed for those drawing an income from their pension, often aiming to reduce volatility as much as possible while generating sufficient returns. Please get in touch if you would like to discuss your options.

7. What Actions Can I Take to Increase My Chances of a Prosperous Retirement?

There’s no hard and fast rules to increasing your retirement savings, but broadly speaking you should be asking yourself the following questions:

  • Should I be saving more? And if so, how much more?
  • Can I make more use of tax-efficient savings vehicles, like pensions and ISAs?
  • Does the level of investment risk being taken put my retirement plans at risk?
  • Are my investment funds performing as well as they should be for the level of risk being taken?
  • Am I overpaying in provider charges, causing an unnecessary drag on my portfolio growth?
  • Can I make better use of cash savings that are getting eroded by inflation?
  • Are my assets structured to draw an income in the most tax-efficient way?
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Neil
Pensions Advice

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Income Protection

Our Financial Forecasting Undertaken with Clients

Below is an example of how we help our clients plan for retirement using leading financial forecasting software.

It allows us to truly put our clients in control of their financial future, working together to create a road map which will help put them on track to achieve their life goals.

Neil Adams DipPFS
Financial Planner at Drewberry

We input client’s financial situation into the software including income and expenditure. We can plan for significant future life events, such as retirement, care needs as well as significant expenditure items (weddings, special holidays etc).

Clients' financial timeline

This produces an analysis of the client’s current financial situation, which can be viewed as a cash flow (how and where each year’s expenses are met from). Below you can see an illustration of one couple’s cash flow at the end of their careers and throughout their retirement.

Clients' base hand cash flow

On the graph above, the areas shown in red represent any shortfalls in income required. In the above scenario we can see that the clients work to age 65, then “spend” their accumulated pensions to purchase a lifetime annuity income using cash savings to supplement income as far as they can stretch.

There are significant shortfalls in the plan as you can see from the massive shortfall after they reach age 80. You can also see that their annuity doesn’t allow them to fund big one-off luxuries, in this example being a trip of a lifetime or a big party to celebrate their 50th wedding anniversary.

From our analysis of our clients’ potential financial futures, we can then create “what if” scenarios to stress test different financial planning opportunities.

1.

Scenario One – Invest Cash Savings

In the scenario illustrated in the graph above, the clients’ cash savings, which were earning a rate of interest less than inflation, were invested for better returns in a diversified portfolio containing bonds, property and equities.

We can see that there are now enough sources of income and other assets to support the desired lifestyle into the clients’ 90s. They can even afford to take that trip of a lifetime, making the most of their retirement. Yet there is still more that we can do.

Investing cash savings
2.

Scenario Two – Drawdown rather than Annuity

Taking this case one step further, we conducted some planning with their pensions to maximise contributions and use drawdown in retirement rather than the traditional annuity purchase route (please note this is just an example and may not be suitable for your specific circumstances).

Choosing drawdown over an annuity

Because of this we can now see that all expenses are met until the clients’ mid 90s and there are even funds remaining at the end of the timeline to pass onto loved ones. The use of drawdown in this example has enabled these clients to gain investment growth on their pension savings during retirement, helping them to meet their income needs and afford the extra desired luxuries.

Please note this is a very simplified case study for illustration purposes only.

Financial forecasting and stochastic modelling is based on several assumptions which may or may not be borne out in practice and outcomes cannot be guaranteed.  The purpose of the software is to highlight planning opportunities given stated objectives and allow further in-depth discussion with your adviser on the pros and cons of each.

Repeating this process over a number of years at each regular financial review also helps to ensure you remain on course to meet your lifetime goals and maintain your financial independence.

Ben Sassoon Chartered MCSI
Financial Planner at Drewberry

How Financial Planning Can Lead to a Richer Retirement

If you don’t feel comfortable going through the above process yourself then we can help. As financial planners this is what we do.

In addition to advising on leading investment products, using financial forecasting software we can help to plan out positive financial futures. The graphical nature of the software means we can show you your current trajectory and the potential impact of suggested changes.

For most clients, the starting place is with a comprehensive financial and investment management plan. Please get in touch by calling 02084327333 if you would like to find out more or download our financial plan brochure.

Peter Banks, Wealth & Investments Expert at Drewberry, discusses the benefits of financial advice

Research from Old Mutual in 2016 showed that the average UK income in retirement is £18,000 per annum. However, the average for those who set goals working with a Financial Adviser is £24,175.

Put another way, by not working with a financial adviser, a client can potentially lose out on an extra 41% or as much as £147,147 over the course of a 21-year retirement.*

Peter Banks DipFA, AwPETR
Wealth & Investments Expert at Drewberry

*Source: Retirement Income Uncovered – The New Normal 2016.

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Get Your Own Financial Plan…

We all have goals and dreams of where we and our families want to be. But how do you ensure that you fulfil these ambitions and that they don’t pass you by?

A Drewberry Financial Plan will help put you in control of your finances. Understand where you stand today and put a roadmap in place to ensure you are on track to live the life you want to lead.

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Important Disclaimers

The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested. In addition, tax treatment varies according to individual circumstances and is subject to change.

This page and its content are provided for guidance only; they should not be construed as financial advice. Drewberry strongly recommends you seek professional financial advice – such as that on offer from our experts – before making any decisions about your retirement. Growth rates indicated here are purely for illustrative purposes only.

Need Help? Start Live Chat with our Experts  

Neil
Pensions Advice

Robert
Income Protection
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