Is your retirement on track?
Take these 3 simple tests
Wherever you retire in the world, three big questions dominate when trying to plan our financial futures:
1) how much do I need to retire?
2) how much should I be saving?
3) how can I make my retirement savings last?
For comprehensive individual financial planning, you should speak to a qualified financial adviser – some pension decisions are irreversible and are not to be taken lightly. But it is important to know the basics to get started, with three simple tests you can do yourself.
Test 1: The power of 7
Pension Wise, the UK government guidance service, recommends working out how much you’ll need to live on when retired by adding up all the living costs you have now, and subtracting these from your retirement income.
But how much is that in real terms? Research by Fidelity International found those who save seven times their annual household income by the age of 68 should be able to retire in a similar standard of living as in their working life.
The key is to start as early as possible – and hit seven milestones. Save at least one times your annual income by the age of 30, twice your income by 40, four times by age 50, six times by age 60, finally reaching seven times by age 68 and retirement. Of course, if you want to retire earlier, you’ll need to squirrel away more.
Test 2: Stay lucky
Eight out of 10 people surveyed by the Pensions and Lifetime Saving Association said defined targets would be helpful for the purpose of retirement planning. So here goes – stay lucky with the 13% rule.
Fidelity International ran the numbers and reckon each year from age 25 to 68 we should be saving at least 13% of our income, before tax. In the UK employees have to (unless they opt out) tuck away 5% and their boss 3%. But beware that leaves a 5pc shortfall on the recommended, rather than bare minimum, amount. And this should rise to a total of 15% by age 30 and 18% by age 35.
Test 3: (Less than) 5% is best
You have retired, well done. Now you have to make it last. Under rules introduced in the UK in April 2015, once you reach the age of 55, you can take the whole of your pension pot as cash in one go if you wish. However, if you do this, you could end up with a large tax bill and run out of money in retirement.
Instead it can be better to stay invested and take an income, while ideally your pot continues to grow. A decade ago, based on retiring at age 68, the consensus in the investment world was withdraw no more than 5% a year as income. But as life expectancy has risen, and income from bond yields has tumbled, this has got more conservative.
Retire for 25 years and Fidelity International has calculated a withdrawal rate range 4.1% to 4.4%. Be prepared to cut that further if stock markets slide lowering your returns.
As a guide, the average weekly income after housing costs for pensioners in 2017/18 prices was £304, rising to £454 for couples, according to analysis by the Department for Work and Pensions (DWP).
If you would like a free UK pension review, simply contact us and we’ll set things in motion.
Brite Advisors will do all the hard work for you and get your money working hard too – ready for retirement.