Your retirement will hopefully be a long one and represent a significant proportion of your life.
But, retirement is a story and, like most good stories, it has a beginning, middle and end. Inevitably, over what can be decades, your lifestyle, level of activity and needs will undergo some profound changes.
It’s important to recognise this because it has big implications for the way in which you make plans for your retirement years. Put simply, most people will want to spend more in the earlier years of their retirement and less as they grow older.
There are many ways in which income needs are reduced as retirement progresses.
Often, people will move into smaller accommodation when they retire. Their children have left home and they don’t want the hassle of the upkeep of a larger property. This reduces outgoings and can often release capital that can used for their retirement planning.
People tend to switch to smaller cars, which are less expensive to run and they probably only feel the need for one family car. Children are usually independent by now and don’t need to draw on the Bank of Mum and Dad. Smaller families and increasing age are likely to lead to lower grocery bills. As you grow older, you are less interested in fashion and spend less on clothing and you go on fewer holidays. On the other hand, many things, from prescription charges to public transport and museum entry, become free or discounted.
Early years of retirement
In the early years of retirement, however, it is likely you’ll want to enjoy life to the full and do those things you didn’t have the time or money to do when you were working. A flexible drawdown pension allows you to take more money in those early years and taper off your requirements as time goes on. Not only that, but once many people recognise that they will need less income towards the end of this time, they realise that they may be able to retire earlier than they had anticipated.
Our clients Paul and Mary Rogers (names changed for the purpose of article) retired when they both reached the age of 63 and between them had built up retirement provisions worth about £500,000 in total. This was held in both Pension and ISA.
For the earlier years of their retirement they calculated that they would need an annual £40,000 net of tax to allow them to fulfil some ambitions, taking about three holidays a year, including a cruise, and to enjoy going out to restaurants and the theatre and playing golf.
When they reached 66, they both qualified for the state pension of £9,000 a year, so the annual withdrawal on their private pension pots was reduced to £22,000 a year. They continued to draw this until they reached the age of 75, by which time they were beginning to slow down, taking fewer holidays, largely confined to the UK, and going out less. Now their income requirement was down to £30,000 a year, meaning they just had to draw £12,000 a year from the pensions.
Five years later, they had given up driving, holidays were largely limited to occasional visits to the children and they hardly dined out. By this time, they only needed £20,000 net a year, which, after the state pension, only had to be topped up by taking an annual £2,000 from the pension fund, which still had a comfortable balance.
Paul and Mary enjoyed their retirement years and were able to fulfil a lot of dreams while they were still fit and healthy. They could do this because recognising that they would need less money in the later years meant they could afford to retire a couple of years early and load more of their spending into the earlier years. At Reeves we will sit down with you and discuss what your likely income levels will be at what stages and what you can afford. The result is often a pleasant surprise.
This article is for information only and should not be construed as advice or a recommendation. The investment strategies mentioned are examples only and may not be suitable for your particular: circumstances, tax position or objectives. Please seek independent financial advice before taking any action.
Investments carry risk, capital invested may go down as well as up and you may not get back the original capital invested.