Pension planning can often be stressful, overwhelming, and just plain taxing. However, doing your due diligence now will mean that you will be able to embrace retirement more fully, and with more control over your future.
One thing to keep in mind is that retirement planning is really about achieving financial independence after so many years of working towards this goal. Knowing that the state pension is not likely to provide the comfortable, stress-free retirement you have been yearning for is another factor that will help keep you motivated when starting to plan for retirement.
Can I afford it?
One of the first tasks of retirement planning, for those who have already begun to save, is to pick an ‘ideal’ retirement date and see whether or not this date is realistic. To do this, take a look at your outgoings and expenditures and try to see what this budget will be like in retirement. Be sure not to miss factors – both big and small – that are likely to change, such as whether a mortgage will be paid off, or if you will qualify for free public transportation.
You should also make a list of your financial assets. This should include more than just your pension funds, if you have them, and encompass anything that has the potential to generate income in retirement.
This list will help you determine the maximum possible income that you could retire with. After that comes a slightly trickier part: what is the real return on these assets? Rather than looking at the rate of return on your savings, you can use the rate of inflation to try and predict the real rate of returns after critical factors like inflation. Though we cannot predict how inflation will rise and fall in the years to come, taking your rate of return minus the current rate of inflation will help you understand what kind of ‘profits’ you are actually netting. For example, if you have a 6% return on investments but inflation is set at 4%, you are actually receiving 2% in earnings after inflation has corroded the value of your money.
Deferring Retirement
All of these steps will help you understand whether or not you will be able to afford retirement at the ‘goal’ time in your life. If you can not, however, don’t despair. Recent changes to policy have made the Default Retirement Age null and void. This means that your employer can no longer force you to retire at 65, and has to prove that poor performance is linked to age in order to fire you.
Deferring retirement also has financial rewards, as you will be able to choose either a cash lump sum or higher weekly payments to your state pension after deferring for at least 12 months.