From living longer to inflation, interest rates, and market volatility, the true cost of retirement planning in the UK often differs from people’s expectations. In this guide, we look at several areas where you might be able to improve your existing retirement strategy.
“You are never too old to set another goal or to dream a new dream.”
CS Lewis
How much do I need to retire comfortably in the UK?
Do you daydream about what you’re going to do when you finally retire? Many people have big plans that involve travel, hobbies, or even relocating. However, all of these ideas usually come with a hefty price tag.
To plan effectively, you need to decide what your retirement will look like based on your estimated annual spend. The Retirement Living Standards uses three benchmarks to help you picture the type of lifestyle you could enjoy.
- Minimum – £21,600 for a couple, and £13,400 for an individual. This covers basic needs with little room for extras.
- Moderate – £43,900 for a couple, and £31,700 for an individual.
- Comfortable – £60,000 for a couple, and £43,900 for an individual.
- …and with the right financial planning, Luxurious – this figure will be personal to you as an individual or a couple. It needs to ensure you can enjoy the lifestyle you’re currently living and achieve all your retirement aspirations.
By looking at current costs for different levels of retirement, you can get an accurate reality for your financial planning. Unless you have large debts and outgoings, most couples in receipt of the full state pension should meet the ‘minimum’ lifestyle.
However, if you are seeking a ‘comfortable’ retirement, then you need to make sure you have enough for some luxuries and a solid financial buffer. Unless you carry out a cash-flow planning exercise, you’re not ‘planning’, you’re just guessing.
Managing inflation risk
There are two big risks to achieving a stable retirement: living longer than your money lasts and the eroding power of inflation. Over a retirement period of 20 to 30 years, the cost of goods could double. Therefore, the same monthly income that met your needs at age 65 might not cover all your bills when you’re 85.
Your retirement strategy needs to be robust and resilient, accounting for longevity risks and the possibility of reaching your 90s. Your financial planning should consider market changes that could impact your investments, as well as any other inflation-linked income sources.
Diversified retirement plan
Relying on a single source of income to fund your retirement is an unwise strategy. Instead, you should look at ways to diversify your retirement plan. The State Pension alone might not provide you with the lifestyle you desire. Consider workplace and personal pensions, ISAs, and other trusted savings and investment opportunities.
Knowing when your State Pension starts will ensure you can bridge the gap with other forms of savings if you choose to retire sooner. You can currently draw down on private pensions from age 55 (57 from April 2028) or you could use your ISAs to preserve your pension pot.
Tax on retirement income
Many people are surprised to learn that their retirement income is still subject to income tax. Whether it’s from a pension, a part-time job, or rental income, HMRC will tax you if you exceed your personal allowance.
Tax-efficient withdrawal relies on balancing how much you take from your initial 25% ‘tax-free’ pension lump sum versus your taxable income streams. With the right financial strategy, this could save you thousands of pounds in the long run.
Housing and debts
For most people, mortgage payments and house-related costs make up most of their monthly cash flow. If you retire with a mortgage, your necessary income could be significantly higher than if you own your home outright.
If you have a number of debts, these should also be factored into your retirement income when you’re no longer employed or receiving dividends. You might need to make big decisions around downsizing, so you can free up some capital to preserve your wealth.
Health and care costs
Everyone hopes for a healthy retirement, but in reality, we tend to need more healthcare as we get older. To limit the potential impact of medical treatment on your savings, consider different forms of protection, such as private medical insurance.
Ignoring the possibility of care costs can dramatically impact your retirement plans and your legacy. It’s essential that you include a ‘contingency’ pot within your savings. The cost of care will depend on your individual needs. Home care starts around £25 per hour, while a residential care home currently averages £1,298 per week. If you need more specialist care, then a nursing home averages £1,535 per week.
Retirement planning, Nottingham
When planning for your retirement, it’s wise to prepare for different eventualities you may face in later life. As well as the impact of rising inflation and other unexpected expenses, it’s important to ensure you’ll always have enough income to support you and your partner. Make sure you have enough saved so you can enjoy your well-earned retirement.
At Balance: Wealth Planning, we have a multi-award winning financial planning team who can help you with your retirement planning. We will carry out a cash-flow planning exercise, so you have a clearer picture of your financial future. We’ll review your pensions, savings and investments, and we’ll build a financial plan to help you achieve your retirement goals.
For more information, please see our Financial Planning page.
For retirement planning advice or a financial review, get in touch to speak to our financial planners.
Sources:
https://www.retirementlivingstandards.org.uk/
https://www.ageuk.org.uk/information-advice/care/paying-for-care/paying-for-homecare/
