During idle moments, and when work is particularly stressful, many of us turn our minds to that magical day when we will leave it all behind and embark on the potentially wonderful journey that is retirement. There can be few people who haven’t given it a thought, and those contemplations become more frequent the older we get.
This may be daydreaming, but in fact thinking about retirement well in advance of the day when we actually clock out for the final time is very sensible. As with so much in life, preparation is key, and there are some key milestones when those thoughts about your post-work life are vital – whatever age you actually plan to retire.
Ten Years Out
A decade may seem like a long time, but if you want to make sure you have a solid pension to enable you to live the life you want to when you stop work, a thorough review at this stage is a sound idea.
Of course, you will want to assess how big your pension pot is and whether you need to be contributing more in the last ten years of your working life. Now is the time to track down any pensions from previous employments - the government’s Pension Tracing Service can help you here.
But you also need to be looking at how your pension(s) are performing, and whether you have them invested in the right funds. A financial advisor is definitely an advantage here, because if you get it wrong, it could significantly reduce the amount you have to live on when you finally retire.
Five Years Out
All of the ‘Ten Years Out’ things still apply here, but now is also the time to be thinking seriously about when and how you will retire, and what sort of life you want to lead when you do.
So will you stop work on a set date, or do you have the kind of career where you can ‘retire in slow motion’, where perhaps you step down to part-time work before finally stopping? This phased approach might help you achieve the reduction in stress that you seek, while still providing you with an income so that you don’t have to take so much out of your pension in the early years of retirement.
If you run your own business, you need to be thinking of an exit plan, whether that is a trade sale, a management buyout, or even a phased running down of the business. How will you extract value from the company when you leave?
Now is also the time to be doing some serious budget planning, working out how much income you are going to need to live the lifestyle you aspire to when you stop work. Will you need some cash for big capital expenditure, such as paying off a mortgage?
How much will you need to meet the necessities of life? And what income will you need to fulfil all of those retirement dreams which have kept you going during the stressful working years? This is where sophisticated cashflow modelling software can really help you understand whether you will be able to afford the retirement lifestyle you hope for.
This is also the time to check what your state pension benefits will be, and whether there are any gaps in your national insurance record which might reduce the amount you receive. You can check this online; all you need is your national insurance number. If you plan to retire before the state pension age (which will be 67 from 2028), you will need to know you can plug that income gap during the intervening years.
Finally, you also need to factor in the retirement plans of your spouse or partner. If they are older or younger than you, then will you retire at the same time, and what impact will that have on their pension?
Two Years Out
This is when you will need to focus on how you will take your pension benefits. Unless you are one of the lucky ones with a defined benefit (i.e. final salary) pension scheme, you essentially have three ways of taking money from your pension pot: a lump sum, an annuity, or leaving the pension invested and drawing down from it over time (or indeed, a combination of all three).
Your choice will determine whether you need to be de-risking your investments within the pension. If you need its value to be at a certain level on the day you retire (because you are buying an annuity, for example), you will want to protect your pot from short-term volatility as you approach retirement. If you are leaving it invested to draw down from, you can carry a higher level of risk.
You may also want to be looking at consolidating pensions to minimise charges and to simplify taking your income when you do retire – and because some older pension schemes don’t allow flexible drawdown. But be careful not to give up any legacy benefits such as guaranteed annuities; this is an area where you really do need to take professional advice.
This is also the time to be thinking about the non-financial aspects of retirement. How will you fill your time? Will you adjust to a lack of structure to your days? Are your friends retiring as well, or will they still be working – and if so, where will you find social interaction? You don’t have to wait until retirement day to start finding new activities and new friends.
Even the time of year you actually retire can make a difference: if you plan to spend your retirement fishing, you might not want to stop work in the winter when you will have to wait some months before you can start to fulfil your dream.
Six Months Out
This is when it starts to become reality. You can probably make a more concrete and more accurate expenditure plan. You may be firming up your plans for your post-retirement blow-out holiday (which you will need to pay for, of course).
At work, make sure you have a good exit plan. Know what your notice period is, and make sure you have all of your financial and emotional ducks in a row before you actually resign. Are you sure you definitely want to retire? It’s not too late to postpone the day!
Retirement Day
This is it – you are retired. When will you get your first pension payment? It could be anything up to two months after your last salary, depending on which day of the month each is paid.
This isn’t the end of your retirement planning, especially if you have opted to draw down your pension over time. You will need regular reviews with your advisor to make sure your investments are keeping up with your needs; don’t be afraid of tweaking either your investment plan or your expenditure budget to make sure both continue to work for you.
And remember: retirement shouldn’t be viewed as the end of your productive years, but as the beginning of something new. This is what you have dreamt of all those years; now is the time to enjoy it.