Understanding your income in retirement can feel overwhelming at first, but taking it one step at a time is a great way to ease the tension that planning for the future can create.
By following these steps, you can look to paint a clear picture of where you stand now and whether your pension can give you the retirement you strive for.
Look at the big picture
Before you think about the numbers, consider what you want your retirement to look like. What are your priorities?
- Do you want to focus on your hobbies?
- Would you like to be more active in your community?
- Will you spend more time with your grandchildren?
- Do you want to travel?
- Have you got financial commitments to keep up with?
- What age do you want to retire?
Knowing when and how you’ll spend your money is the first step to finding out how well your current pension is set up to support you.
Understand your outgoings in retirement
Consider how much your desired retirement lifestyle will cost. From your weekly food shop to buying that bungalow by the beach, think about how much you expect these to cost each year.
When calculating your expenditure, don’t forget to factor in inflation. The expenses you have will most likely rise over the years. Keep this in mind to create a more future-proof budget.
Evaluate what you have now
Next, it’s time to find out where you stand now. An accurate assessment of your current pension pots can predict how much you’re likely to have by the time you want to retire.
If you’re unsure of which pension schemes you’re a part of, you can use the government’s free Pension Tracing Service. It will search a database of more than 200,000 workplace and personal pensions to find the contact details for any schemes you may have a pension pot with. A financial adviser can also do this for you.
Once you have tracked down your pension pots, contact the providers. Ask them to tell you what your pot will be worth now and in the future. Don’t forget to get a forecast of your State Pension – for most people it provides a large proportion of their income during retirement. You can get this using the State Pension forecast.
Figure out if you have enough
Finally, you can get on with the part you’re probably most interested in – finding out if you will have enough money to enjoy your retirement without worrying about your finances.
You can calculate how likely this is by adding the expected income from your pension pots and State Pension together and comparing this sum to the income you’ll need in retirement.
As a general rule of thumb assume that you will use 4% of your total pension a year. For example, for every £100,000 you have, assume you will withdraw £4,000 annually. Although many variables can affect your true situation come retirement, this is a good way to get a rough idea of where you stand.
Also, keep in mind that your pension may be taxed. You can use an online tax calculator to get an understanding of how this can affect your income.
If you have a gap between your predicted income and expenditure, or it looks like you’ll run out of money sooner than expected, it’s time to take action and adjust your plans.
The most straightforward way is to pay more into your pension schemes to increase the value of your final pot. If this isn’t an option for you, you could adjust your retirement plans to cut down on costs and lower your expenditure.
If you don’t want to compromise on your lifestyle now or during retirement, you could also consider extending your time in employment. Earning an income and contributing to your pots for longer means you’ll have more money to live on for a shorter period of time.
What’s right for you will depend entirely on your situation. If you think you would feel more comfortable having a third-party opinion, you can also take your concerns to a financial adviser. Professional help may be just what you need to get your retirement plans back on track.
Having to monitor multiple pension pots when preparing for your retirement can be complicated. Combining some of them could simplify things. Just make sure to consider all the benefits and potential downsides of consolidating before proceeding.
Consolidating pots can make it easier to:
- Stay up to date with your contributions
- Keep track of projected growth
- See the impact of any changes to your scheme
- Avoid paying multiple administration fees
However, the benefits of consolidating may come at a price:
- You may have to pay transfer or exit fees to move your funds from one pot to another
- You could lose the guaranteed benefits included in your original schemes
You’ll need to weigh up the pros and cons of each option to make sure you’re happy with the trade-off.
Although there are a whole host of factors to consider when creating your retirement plan, you don’t have to get mired in the details. If you feel lost, remember to keep sight of what you want out of your retirement. Working towards those goals can help you make decisions that will give set you on the right path.
Finally, remember that you’re not in this alone. Take charge of your financial wellbeing and reach out for expert financial advice on how to make the most out of your retirement.