Planning for Retirement?: Engage Guide To Wealth Management
Part 1: Financial Forecasting for Retirement
Retirement planning is one of the most significant financial steps you’ll take in your life. It involves preparing for the day when you’ll stop working, ensuring that you have enough funds to maintain your desired lifestyle.
Proper planning will help you navigate the complexities of retirement planning and can make the difference between a comfortable retirement and one where you struggle to meet your basic needs.
Financial forecasting is the foundation of any retirement plan.
It involves estimating your future financial needs and resources, allowing you to set realistic savings goals and make informed investment decisions. Forecasting also allows you to review different aspects of your future and to see clearly how decisions impact one another.
Estimating Retirement Expenses
For financial forecasting you’ll need to estimate how much you’ll need to live on during retirement. This depends on several factors including:
Lifestyle: Consider the kind of lifestyle you want to maintain. Do you plan to travel, pursue hobbies, or live more modestly?
Healthcare Costs: As you get older, healthcare costs tend to rise. The NHS covers many healthcare needs, but you might still need to budget for private healthcare, dental care, or long-term care.
Inflation: Inflation reduces the purchasing power of money over time. It’s crucial to factor in inflation when estimating your future expenses.
Calculating Your Retirement Income
You need to calculate your expected income during retirement. This income may come from various sources:
State Pension: The State Pension provides a foundation for retirement income. The amount you receive depends on your National Insurance contributions. You may not receive the full new State Pension if you haven’t made enough contributions. It is possible to make voluntary contributions if you have a contribution shortfall.
Company, Workplace and Group Pensions or SSAS: Many people have workplace pensions. These can be defined benefit pensions (which provide a guaranteed income) or defined contribution pensions (where the income depends on the amount saved and the investment performance).
Personal Pensions: Some people have built up these pensions. The income from these will depend on the income and performance of the underlying investments.
Savings and Investments: Personal savings, ISAs, and other investments can provide additional income in retirement.
Part-time Work: Some people choose to work parttime during retirement to supplement their income.
Inheritance: If you are likely to receive an inheritance from elderly parents, this should be considered as a potential source of income.
Property Income : Some people have investment property; residential or commercial, which is providing an income. Depending on the ownership structure, there might be flexibility in how and when the income can be drawn
Workplace and personal pension schemes will have specific rules about how the money can be drawn in retirement (lump sums and income) and when it can be drawn, which is explained later in this guide.
Creating a Retirement Budget
Once you’ve estimated your expenses and income, you can create a retirement budget. This should split your expenses by what is ‘essential’ and ‘discretionary’, and what is needed for a contingency or ‘emergency’ fund:
Essential Expenses: Housing, utilities, food, healthcare, and other necessities.
Discretionary Expenses: Travel, hobbies, dining out, and other non-essential activities or ‘nice-to-haves’.
Contingency Fund: Set aside funds for unexpected expenses, such as home repairs or medical emergencies.
Assessing the Gap
After creating your retirement budget, compare your expected income with your estimated expenses. If there’s a shortfall, you’ll need to adjust your savings plan, investment strategy, retirement age, or future expectations to bridge the gap.