Here we are at session number 77 , and we’re going to be talking about the run-in to retirement. What are the things you should be thinking about ten years out from the day you want to give up work for good and when you want to be financially independent? Much more in this in today’s show…
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When I surveyed my email list earlier this year, I also took a look at the back catalogue of the podcast and realised that there were relatively few podcasts on retirement specifics. I have addressed that a bit since with a two-part session on how to retire early in Session 72 and Session 73. In my day job as a financial planner, I seem to have hit a run of new clients coming to me at about the 8-10 years from retirement stage, and it has prompted me to record today’s show for those in similar positions. After all, I can’t help everyone in person so the podcast gives me the platform to spread the word more widely.
There have been quite a few interviews recently, which is great of course, but I imagine it will feel like slipping on a comfortable and familiar pullover, as we revert to our usual format of first looking at what you need to know and then what you need to do!
Everything you need to KNOW
So what do you need to bear in mind when you are on the run-in to retirement?
1 – It’s time to get serious
Up to this point, you have likely had lots of things to think about financially. Folks who are in the last ten years of their desired working life have maybe had kids go to university or about to. Lots of financial considerations with that. Maybe you have had career moves aplenty, and are now at the top of your career path. Maybe you are in the home straight of paying off a mortgage too.
All these things take focus, discipline and effort. But none of them, I would argue, are quite so big as the rest of your life, after work.
If you’re like most people I come across, retirement provision hasn’t been very focused. If you have been in the same job for years with a quality final-salary scheme, then you haven’t had to give much thought to retirement provision, it has been mostly looked after for you.
A more common situation that I tend to deal with is with those people who have moved jobs a few times and amassed bits of pension fund all over the place. They don’t really know what they have got and where it all is. Now is the time to get serious about your plans for retirement and the provision for it. With ten years to go, you want to be knuckling down to the task in a focused and disciplined way. Hopefully this session will give you the motivation to do that and the practical steps to take too, in the second half of the show.
2 – It’s time to rationalise
If at all possible, now is the time to make your financial life as simple as possible and to rationalise. I like my own life to be simple and straightforward, without a load of unnecessary complication. How about you?
When I am advising clients, I always have an eye on my regulator, as you can imagine. The Financial Conduct Authority is keen to ensure that clients’ existing plans are not being churned for the sake of it. Churning means swapping one product for another one, with the main purpose of the exercise being to generate a fee for the adviser. Churning is bad, then, but rationalisation is good.
There are lots of practical things to think about when considering moving one pension pot into another. The first one is to ask why that might be a good idea. Rationalisation and simplification is one good reason. Why have four annual statements from four different pensions when you can have one, showing your whole pension fund?
Other benefits might be cost saving, better fund choice, more options at retirement and the rest. In the second half of the show, I’ll give you a checklist of the things to make sure you’re aware of before you move pension funds around.
3 – It’s time to get detailed
Up to this point, retirement has probably been a bit of a vague idea; something that will happen eventually which I know I need to save for. With the finish line in sight, it’s time to get more detailed in your thinking about retirement.
You need to know how much income you are likely to receive from different sources at different times. You need to know what your likely expenditure is going to be. As much as you can know about the future, you need to get clear on so that you can focus your efforts on filling any gaps over the next ten years or however long you have left.
In short, it’s time to do some work to make sure that you know exactly where you are right now and where you want to be. The time has gone for soft-filter dreamy visions of retirement; it’s time to get crystal clear with gritty, high definition detail.
Those three things might sound a bit wooly, but don’t worry, the practical stuff is coming. I wanted to position your mindset more than anything else, before we get into the practical steps to take to make sure you’re well positioned for retirement.
Ready? Let’s get to work…
Everything you need to DO
1 – Know where you are now and where you want to be
Time for some detail. The only way to be sure you can get from A to B is to know what both A and B look like.
Starting with A, which is where we are right now, we need to get clear on some things. Firstly, we need to know exactly what our pension provision looks like. So you need to get together all the statements and documents pertaining to your pensions. If you are married or in a long term partnership with someone, you should probably do this together. Chances are both of you have pensions, and presuming you’re going to spend your retirement together, now would be a good time to co-ordinate your efforts.
Sit down and look at what you have. This should obviously include pension funds, but should also take into account any other savings plans and investments too, including investment properties if you have them.
Get granular with the detail. Looking at pensions, you need to get this information together:
- Up-to-date valuation of the pension or investment
- Details of the current funds you are invested in
- Details of the costs of your current plans, including policy fees and fund charges
- Are there any costs to transfer to another provider or plan?
- Are there any guarantees built into the current plan, such as guaranteed annuity rates, or enhanced entitlement to tax free cash?
- In the case of final salary schemes, look for an up-to-date forecast of what income you might receive in retirement – what date is it payable from?
- Are there any penalties for taking pension benefits early?
Collate all this information on to a spreadsheet or just a piece of paper so you can see it at a glance. You’re looking for obvious red flags as we move onto the next step where we’ll try to rationalise, but we’ll get to that in a minute.
Collect similar information for your other, non-pension investments. These will be by definition more flexible, but I do believe that as you approach retirement, there is merit in rationalisation, in making your life simpler.
You should also approach the Pensions Service and ask for a state pension forecast. Do this online here.
So you should end up with a pretty good idea of what plans you have got where, but how do you know what that might end up giving you as an income?
Retirement has many definitions, but one that I like is the transition from accumulating money to spending it. Retirement is usually (but not always) the point at which income from employment ceases. At that point, you will need to turn to the money you have amassed and begin drawing down from it. With ten years to go, you can’t be exact, but here are the rules of thumb that I might use:
Let’s say you have a pension fund of £150,000 right now. Let’s say also that you are paying in £500 per month, so you are adding to your pension fund by £6,000 per year. That means that one year from now, you will have £156,000 in your pension fund. Now add on some growth. If you are cautiously invested, add on 4%, balanced, add on 5% and adventurous, add on 6%. Do this sum ten times if you are ten years out from retirement and you’ll end up with an idea of the kind of pension fund you might have. These are fairly conservative multipliers and should take some account of inflation too.
Taking the balanced example of 5% you should have a pension fund of £302,166 in ten years’ time.
If you are likely to have any outstanding debt at your chosen retirement date, then you’ll need to deduct that now, probably. I’m guessing you don’t want to be making payments on debt into your twilight years, so let’s assume you pay that off in ten years’ time too.
Whatever you have left, add up a kind of grand total. Money which can be drawn from in the form of income or regular withdrawals, so pensions, ISAs, cash in the bank etc, add it all up. Then you’ll need to take a view as to what level of income that fund will sustain for the rest of your life. We call that the safe withdrawal rate, and I have a seven minute video which explains how it works in video episode 276.
So if, when you add everything up, and have taken off any debt repayments of big items of expenditure you want to make, you have £500,000 left, use a rule-of-thumb withdrawal rate to work out what this might mean in terms of regular income. 4% is a good place to start – £500,000 equals £20,000 per year.
You need to end up with two types of information: one is the source of income you know about – state pensions, final salary or guaranteed annuity pensions and the like, and the other is the capital sum you are likely to have at your disposal, which you can notionally convert into an income.
Phew – lots of things to think about there. That’s why we have headings and subheadings! In short though, you need to know where you are now, and where you are likely to be in terms of income sources and capital amassed at the magic date ten years or however long down the line.
Needless to say there is the danger that a lay person might miss something obvious, so if ever there was a time to seek professional help, this is it. There’s a button marked Work with Pete on the website if you want me to help you, but be warned, I’m getting perilously close to capacity!
2 – Rationalise your pension provision where possible
At some point between now and the date you retire, you’re going to need to tidy things up. As I have said, over time we all amass different pensions pots, investments and policies. Some of which may be fit for purpose still, but others perhaps not. Your retirement date is to my mind the latest point at which you want to simplify things, but as a rule, I prefer to do so well in advance of that.
Now that you know all about your existing pensions and investments, perhaps now is the time to tidy them up and make your life easier.
One of your existing pots may be good enough to transfer all others into. Your chosen pension pot should be low cost, flexible, with decent fund choice, ideally including the passive, multi-asset funds I’m always banging on about.
Ditto with your investments. By now you low that I think you should have targets set for your investments, so you know what you’re aiming for. Your liquid investments may be invested differently to your pensions, but this all comes from having a plan. I don’t see any sense in having fifteen different holdings with lots of individual fund houses when you can have a wrap platform holding everything in one place, making reporting and planning easier.
Maybe it’s just me! But I would make your life as easy as possible, stripping out the extraneous hassle of multiple pensions and savings pots, to enable you to concentrate on what is important.
A word of warning. It is possible to inadvertently give up seriously good benefits by transferring one pension or investment into another. You must know the ins and outs of your pensions particularly before you consider moving them. Needless to say, of you are in a final salary scheme or have a personal pension with guaranteed annuities, the default position is to leave them where they are. It is a very rare circumstance indeed that you would transfer these to a different plan.
3 – Knuckle down and save like crazy
Having rationalised things as best you can in this complex personal finance world we live in, it is really down to you to put all your focus and effort into maximising both returns and savings amounts between now and your target date.
Using the scratch calculation we discussed earlier, and knowing what you know about your existing provision, you should have an idea as to whether your projected income is sufficient. If not, then you’re going to need to increase your savings rate, and maybe take a different approach to investing.
If, having done the calculation earlier, you would like an extra £5,000 per year of income, then it is easy enough to work back from there to work out how much you need to be saving now, and what rate of return you need, and what rate of withdrawal you will need to produce that level of income.
Again, a financial planner can help here, but it is fairly straight forward. Most people get more confused by the different policies and plans they have rather than the basic numbers involved. I should probably create a web app or something that let’s you do these sums, but don’t forget the info and example back in Session 73 to help you out.
It’s important to realise that it is never too late, and that every penny you can save now towards that day when you can begin drawing down from your accumulated wealth, will be worth saving. Try to make every penny work for you by investing wisely and keeping costs down.
4 – Consider phasing into retirement
The last thing you should do, having tidied things up, is to give some serious thought to phasing into retirement. By this I mean reducing your dependence on a salary over time, rather than all at once on one day. If you can see your way to clear to reducing your working hours, from five days a week to three then that will preserve your pension fund that much longer. Maybe you can time this to coincide with a pension kicking in.
So maybe in your mind you want to fully retire at age 65, but one of your old final salary pension kicks in at age 60. Maybe that is the time to drop some hours at work, if possible.
This is a particularly useful technique to employ if you think your retirement income would be less than you ideally want. You can make it last, by delaying your total dependence on it, while still enjoying some of the benefits of working less. Four day weekend anyone?!
I think more and more people will be retiring gradually, and many will never completely finish work. Instead they will reduce hours, or reduce the complexity and responsibility of what they do, with the commensurate reduction in salary, the loss of which can be offset by pensions.
Your situation is unique and there are many variables in each scenario, lots of things which might affect your decisions. That’s why professional advice is so helpful. A competent financial planner can help cut through a lot of the detail for you and get to the heart of the matter. They will be less concerned with products than they are with helping you meet your needs and goals for retirement. Check out the Institute of Financial Planning website and find a CFP professional near you; you won’t regret it.
Or just click the Work With Pete button on the website and get in touch with yours truly. Geography is no obstacle – if you’re in the UK and can communicate by Skype or Google Hangout or FaceTime, we can work together.
There is no better time to experience the value a financial planner can add to your planning than with ten years to go until retirement – do it!
This week’s reviews
[This is where I read the reviews]
Very excited about this week’s review from TacosFTW who is just 16 years old. Get this stuff right at age 16 and the world is your oyster!
If you like what you hear on this podcast, please leave a rating or review on iTunes by going to meaningfulmoney.tv/iTunes just like TacosFTW did this last week. This helps others to hear about the show and to subscribe, because it keeps me near the top of the rankings.
Dropped another pound – down to 16 st 1lb. Still got some of the holiday pounds to shed – slower than I’d like…
Next Session Announcement
Next time we'll be talking about protecting your pensions. After that we’ll leave retirement issues alone for a bit – always best to mix it up a bit! If you have a question on this subject, or any other financial query that you want answering here on the show, then the best way to do that is to leave me a voicemail at meaningfulmoney.tv/askpete
That's it for this session of the MM podcast, I hope it was helpful. If I missed anything or if you have any questions, please leave them comments section below
I hope you enjoyed this session. Thanks for listening – I'll talk to you next time.