A guide for planning the ultimate “vacation”
So How Much Do I Really Need?
When it comes to working out how much money you will need, no two people are exactly the same and a one-size-fits-all definitely isn’t going to work. Most of us will need to rely on the money that we save, various retirement plans and possibly by downsizing our homes.
So get to what your number is, it is a good idea to reverse engineer your retirement. Starting with an estimate of the total annual income you think you will need. From that take away the following:
- Income from part-time work or income in retirement
- Your State Pension
- Non retirement savings income (You need to factor in your cash reserve as well)
- Any inheritance you might receive – and what income it will generate
What’s left is your remaining need. Now look at your current income and how it will change in the future. Points to think about are.
- When will you stop working completely?
- How long might any inheritances or non-retirement savings last?
Taking into account all of the information above, you can now consider how much income you might need from your retirement plans and project that need over your life expectancy.
But don’t forget inflation, as this will have an effect on the buying power of your money over time.
When you determine your remaining annual income needs, you can convert that amount into how much you will fall short by. The next step is to determine the rate of return you will need in order to close the gap.
Say you anticipate retiring with £600,000 in your retirement account and you need £24,000 per year in additional income, after your State Pension and other income (4 percent of your account’s value). Congratulations! you are on track to meet your goals. And by the way, 4 percent is near the top of what we would recommend that you to drawdown on an annual basis from your retirement account. Remember, this is a very long vacation and you need to be able to cope with increasing living costs over time.
But What Happens if I’m Nowhere Near Retirement and I Don’t Have Enough Money Saved?
No matter how far ahead retirement is, the time to start planning is now! The first step is to pay off credit cards and other high-interest loans. Then you should build up your emergency reserve of at least three to 12 months of your income should you face financial hardship for any reason.
Now you will be ready to start building your retirement account, ready for your “vacation”.
The plan is to invest and grow your assets to provide the income that you will need for as long as you live, and one of the best ways to do this is through a personal pension. And here’s why.
- It is convenient — You can set it up to that investments are made automatically every month
- Tax relief — The Government givers us generous tax benefits to encourage us to save for the future.
- It forces us to save — You can’t spend what you have invested, and the chances are, you won’t miss the money after a while anyway.
But What If I Can’t Afford to Save for My Retirement Plan?
All employers have to offer workplace pensions which ensures that a proportion of your salary is invested for you. That’s free money! Always, always join your employer’s workplace pension scheme and from there slowly increase the amount you contribute.
What else could you do?
- Increase your contributions 1 percent every six months.
- Increase contributions by 50 percent if you get a bonus.
Just these 2 strategies can very easily be simulated into your retirement plans and could make a big difference. And here’s a few more ideas.
- Change your car less often and don’t spend quite so much next time.
- Don’t buy a big home with a massive mortgage.
- Be sensible when spending on holidays.
- Eat out less.
Action Call
Are you planning for a fantastic retirement? Not sure if you are on track?
Contact us to today. We can review your current situation and let you know what options are available to you.
If you would like to talk to about financial planning, please get in touch for a no-obligation meeting. Go to our website www.miadvice.co.uk and contact us via our “Get in touch” form on our home page or Contact Martin Dodd on 01902 742221.
Email us at [email protected]
It is advisable to take advice from a professional financial adviser when making major financial planning decisions.
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This article has been prepared in good faith and based on Midlands Investment Agency’s understanding of the law and interpretation thereof at the time of creation. The contents should not be regarded as specific advice and we always recommend that specific advice is sort from a qualified professional. No responsibility can be accepted by Martin Dodd or Midlands Investment Agency Ltd., for any loss that may occur by a person acting or refraining from acting on the basis of this article.
