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Planning for retirement: what to know about pension plan and retirement savings rules

If you have yet to start planning for retirement before you stop working, you most likely do not have an established pension plan that will allow you to retire and enjoy your desired lifestyle.

⛱️ What is a good plan for retirement?Workplace pension, private pension, investment accounts
🔞 What age is too late to start retirement?It is never too late to start planning for retirement
🤑 Where will my retirement income come from?From workplace pensions, SIPPs, state pensions, social benefits, annuities, investments, personal savings, and continued employment
💰 How much money do I need to retire?It depends on several factors, such as lifestyle, inflation rate, and income

To enjoy a comfortable retirement, you need to start your retirement planning as early in your working life as possible, and this Moneyfarm blog has been written to help you with that task. We will outline some sensible rules to follow when planning for retirement. These rules will help you achieve your retirement goals and, in the process, create a checklist to ensure nothing is forgotten.

What is the 4% rule for retirement?

Some professional financial advisers rely on the 4% rule in their financial planning calculations.

The 4% rule (also known as the Bergen rule) is about safely setting your annual pension pot withdrawal rate at 4% and continuing to adjust it for inflation without exhausting your retirement savings over a 30-year timeframe. This rule is worth keeping at the back of your mind as you work through your retirement financial planning exercise.

How do I begin planning for retirement?

In all likelihood, you’ll have two sources of pension income when you retire – your state pension and a workplace pension. So the most reasonable way to start planning for retirement is to establish what the combination of these pension funds will amount to.

You’ll find a handy pension calculator on the Moneyfarm website. Input all your information, including your current pension situation, “occupational pension” (same as a workplace or employee pension), and your pension goal.

It will show you the size of your final pension pot, your estimated annual income, and the ideal monthly contribution to help you reach your retirement pot target. Of course, the computed figures depend on factors such as pension drawdown, what sort of annuity it could buy you, inflation, and future contributions. You will then have to add your state pension to it to give you your estimated combined retirement pension income.

Bear in mind that while the planned retirement age figure you insert into the Moneyfarm pension calculator is flexible, the basic or new state pension age is not.

What are the 5 phases of retirement?

It’s commonly accepted that there are five emotional phases in the retirement process. They are:

  • The pre-retirement phase, in which you should review your 50s retirement savings.
  • The honeymoon phase
  • The disenchantment phase
  • The reorientation phase
  • The stability phase

They are nicely illustrated on the secondwindmovement.com website.

What 5 factors to consider when planning for retirement?

This checklist will come in handy. Here are five things to consider when you want to start planning for retirement.

  1. Calculate how much retirement income you’ll need when you stop working. This “How much do I need for retirement” blog is a helpful reference.
  2. Establish your potential retirement income.
  3. Review your pension options. You’ll find our Moneyfarm pension guide helpful.
  4. Establish where steps 1 to 3 leave you.
  5. Decide what to do next  – You’ll likely need to start a private pension.

What are your pension options?

In addition to your state pension, if you are employed and you earn at least £10,000 per annum, your employer is legally obliged to automatically enrol you in a workplace pension defined contribution or defined benefit pension plan. However, defined benefit plans are becoming increasingly rare, especially in the private sector.

You are strongly advised to invest in a self-employment pension if you work for yourself.

You can also take out your independent defined contribution private pension if you believe you are falling short of your retirement goals. This option is also suitable as a self-employed pension.

There are other private pension options (stakeholder pension) available that allow you to save and withdraw money.

What should you not do in retirement?

People may have diverse answers to what not to do in retirement. But, our retirement advice on things to avoid includes:

  • Don’t mooch around all day doing nothing.
  • Don’t lose your head and go easy on yourself.
  • Never think you’re too old for a new challenge, try new things
  • Don’t neglect your physical appearance.
  • Remember the reason that you started saving for your retirement.

What is the biggest expense in retirement?

Some of the biggest and certainly most significant expenses in retirement include:

  • Mortgage repayments.
  • Rent payments
  • Utility bills
  • Maintenance and repair costs

What are the 7 crucial mistakes of retirement planning?

  • Not having a private pension plan in place.
  • Underestimating how long you might live.
  • Underestimating your outgoings in retirement.
  • Retiring too early – This “How to retire at 55” blog is essential reading if you are hoping to retire early.
  • Not taking all sources of income, all retirement savings and investments into account and not checking out your pension transfer
  • Failing to obtain expert financial advice.
  • Not sharing your plans with your partner or spouse.

Another mistake some high earners make is not staying within their pension lifetime allowance.

What is the best age to retire?

Being able to withdraw 25% of a personal pension pot tax-free when you’re 55 might tempt some people to consider retiring at that age. Still, reviewing your financial circumstances and goals is essential to ensure your retirement investments can support such a move.

According to research from Aviva, 25% of Brits who have their eyes on retiring early aspire to do so at 60. Of course, it’s very subjective, and you may have different ideas. For many, the best time to retire is when they can afford to do so. Also, the data shows that 24% of early retirees return to work because they experience financial difficulty.

What are the 3 Buckets for retirement?

The three buckets for retirement divide your investment portfolio into three sections – short-term, mid-term, and long-term financial needs. The short-term bucket is filled with short-term maturity investments and liquid assets, such as cash, high-yield savings accounts, and money market funds.

The mid-term bucket includes longer term assets such as REITs, fixed-income assets, and longer-term bonds. Finally, the long-term bucket is for riskier assets with a long-term growth aim, such as stocks, peer-to-peer lending, and real estate.

What three 3 risks will you face in retirement?

  • Underestimating your life expectancy
  • The risk of inflation
  • The risk of investing

What are the three biggest pitfalls concerning retirement planning?

The risks when planning for retirement include:

  • Falling into the trap of overspending.
  • Not being positive enough with your retirement investment plans.
  • Not keeping to your investment plan.

What is a good monthly retirement income?

What is considered a good monthly retirement income varies from person to person according to their means and circumstances. According to retirement living standards (RLS) figures, £371,000 (in addition to purchasing an annuity) will afford a couple a comfortable retirement.

What is considered wealthy in retirement?

Research from Which? states that £470,580 (in addition to state pension income) will afford a couple a luxurious retirement.

What do I need monthly to retire?

According to the retirement living standards (RLS) website, the minimum you need monthly to get by is £10,900 per annum. It would, however, only grant you a relatively frugal lifestyle.

Final thoughts on Planning for retirement

Having the best pension plan in place is essential. Depending on the type of pension or retirement account you choose, you can work towards ensuring you enjoy the retirement lifestyle you desire. But pay attention to other investment opportunities like stocks and shares ISAs, which can provide you with tax-free income that doesn’t have to be declared to HMRC.

FAQ

When do I need to start planning for retirement?

As soon as possible, and the earlier, the better. However, it’s never too late to get started. Several strategies exist to help you save for retirement. How much you can contribute to your retirement fund depends on your financial circumstances.

How should I change my investments when I am getting close to retirement?

Ideally, you should restructure your investments to be more conservative by reducing the amount of riskier investments (e.g. small-cap stocks) as retirement approaches. Riskier investments are more likely to be volatile and can lead to bigger losses during an economic downturn. Because they don’t have much time left, older individuals may not have the luxury of waiting for the economy to rebound. Safer investments and diversification should be your focus as you get close to retirement.

How can I potentially reduce taxes in retirement in the UK?

One way to reduce your taxes in the UK is to make use of all your allowances, such as the pension annual allowance, personal allowance, personal savings allowance, savings rate band, marriage allowance, dividend allowance, capital gains tax allowance, and venture capital trusts allowance. You can also save into tax free investment accounts such as stocks and shares ISAs.

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