Early birds need to take the long view
Those taking early retirement should plan astutely to maintain their lifestyle. By Ruth Allen
THERE'S a widely held view that you'll need between half and two-thirds of your final salary, after tax, to maintain your lifestyle in retirement.
“For some this can be fairly accurate,” says Shona Barr of Affinity IFA Limited. “But we all have differing goals and dreams, which inevitably come with varying price tags! Additionally, it is likely that expenditure will be higher in earlier stages of retirement compared to the later years when expenditure naturally decreases.
“Some common retirement dreams include further learning and personal development – photography, art, learning a language, for example. Others include travel, increased family time, voluntary work and befriending.
“Many individuals over-estimate the length of time they will have to continue working full time. Often, when we look at people's financial positions, we find that early retirement or partial retirement is viable. This is a life-changing moment for many, knowing that they have financial security and peace of mind for the rest of their lives, with the ability to have financial freedom well in advance of the traditional age of retirement.
“Equipped with this knowledge, many then retire earlier than state pension age, meaning that income and expenditure changes as retirement evolves. This brings about a greater need for careful planning and ongoing advice. The simple point is that some expenditure will go up, some will stay the same, and some will go down or disappear altogether.
“The best way to work out what your annual expenditure is likely to be is to draw up a budget showing your potential spend under various headings, putting down a realistic figure for each category.
“The heading ‘Living Expenses' covers all your likely regular expenditure and running costs. If you've paid off your mortgage, then your housing costs will obviously be lower. However, you'll still need to budget for maintenance costs, repairs and refurbishments. If you're renting, and more and more retirees are, you'll clearly need to factor this in.
“Many people find their utility bills rise, as they are likely to be spending more time at home. Heating bills, for instance, will be more expensive. Travel costs often go down dramatically, as you won't have to budget for the expense of getting to work. However, you may want to factor in more holidays, mini-breaks, days out and trips to see family and friends.
“Typically, expenditure under the heading ‘Security Net' would include health and later-life care costs, plus any emergency financial help you might need for yourself or your family.
“Under the heading ‘Free Time', most people include the likely cost of enjoying all those things that they never had enough time for when they were working. That can include longer foreign holidays, weekends away, eating out and spending money on hobbies and entertainment.
“Legacy Fund is the amount of money you may want to pass on to your children and grandchildren during your lifetime. This could include helping to pay for their education or a deposit on a property.
“Consumer magazine Which? recently surveyed thousands of its retired members to see where their money was being spent. Its research showed households spend on average just under £2,200 a month or around £26,000 a year. This expenditure covered all the usual basics and provided for a few luxuries such as European holidays, hobbies and meals out. They estimated that if long-haul
trips and the purchase of a new car every five years were to be included, the figure would increase to around £39,000.
“A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation. The advice of an IFA is essential.” Contact Shona Barr, Affinity IFA Limited, 01292 435205.
SELFIE AWARENESS: Retirement allows you the time to take more holidays, the costs of which have to be factored into your planning.