The one dream, nearly all of us think about, is retirement. It’s the time when you won’t have to get up at the crack of dawn and head to work; you can do what you want and finally enjoy life to the fullest.
Retirement is the time that you can decide what you want to do during the day. If you want to spend the day with your grandchildren, it can be done, and if you want to play golf all day, this is also no problem. All of this is possible, if, and only if, you have prepared for your retirement. Below are ten facts of retirement that you need to be aware of if you want any chance of having a successful retirement.
If you don’t want to have a sharp drop in standards when you finally decide to retire from your day job, you need to make sure your pension pot allows for the same spending post-retirement as you spend pre-retirement. Remember, it’s spending, not saving to spend that we’re interested in here.
Retirement costs money. There is no point thinking that when you stop working, you’ll stop spending. In most cases, you’ll end up spending more and having fun cost’s money. Take the grandchildren to the park during the day, and you’ll be asked to buy ice creams for your grandchildren, take the wife for dinner costs, going on holiday all cost money. The list goes on.
Start saving as early as possible in life. Yes, you need to spend your hard-earned money on many things during life, but if you start your pension early, it becomes very manageable knowing that this nest egg will grow over time. If you started saving aged 23, you could save £100 per month until your 63 (i.e. 40 years), and with compound interest and an interest rate of 8% (which is very achievable), you’ll end up with £335,737.
Your state pension is designed to replace 20-40% of your retirement income. In 2019, the basic state pension is worth just £8,546 a year if you qualify for the full amount. This works out at £23 a day. Worse still, you can only receive your state pension when your 66 and if you’re anything like me and have a few years until retirement, it could be as late at 68 (retirement age will go up to 66 in 2020, 67 by 2028 and 68 by 2046). In retirement, you will want some steady, secure income sources, but you need to recognise that this is only part of your income. You need to make sure you have additional streams of income that can be used during your retirement.
The best way to save for the long-term is to invest in the stock market. Leaving your money in cash in the bank account will not help you save for retirement in the long term. Fidelity suggests that “Putting £10,000 in the average savings account ten years ago it would be worth just £8,256 today after inflation, but £24,002 if invested in the FTSE All-Share.”
Stock-Market returns matter. If you invest £100 per month starting age 23 and it grows at 4%, you will only have a pension pot of £147,132. If you grew this by 8% (which is very achievable), you’d end up with £335,737. Note, the FTSE 100 with dividends re-invested, has averaged 8.3% a year for the last ten years.
Watch out for portfolio charges and costs to buy and sell. If you invest £100 per month for 40 years and it grows by an average of 8%, you’ll have a pension pot of £335,737. If you factor in paying 2.5% each on product fees and financial advisors over the 40 years, you’ll end up with over £107,137 less than you would if you invested yourself.
Unfortunately, we are all going to die at some point in the future. It’s important to remember that while you will be dead, your spouse and any others who depend on you, may outlive you. It’s important to realise this and make sure your financial retirement plan considers their needs as well as your own.
Remember the cost of medical care is expensive. Yes, it’s free, but so often there is a requirement to go private as the waiting list means that your quality of life is terrible for too long.
Make sure your retirement savings are used for your retirement and not put towards something else. Too often we meet clients who have used their retirement savings for a holiday home and then wonder why they have no money. Remember, there are no second chances, once the money has been spent, it’s very difficult to replace later in life.