1 Taking stock of your retirement plans
The first step in retirement planning is to work out how much money you will need to cover what you expect to be spending: creating a budget.
So, as Emma Byron of Legal & General explains, you need to have a close look at your household finances and be realistic about your spending.
Transcript: Video 1
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I think there's really three steps that people should be thinking about. First of all, start with the fun part, think about how you're going to be spending your money. And I think it's really, really important to be honest and realistic with yourself. Quite often people will just focus on the essential spend, and that's not really going to give them the retirement they want.
So perhaps think about cutting it down into two parts, what's your essential spend and then what's all the nice to haves. And with your essential spend, you really want to secure that with an income that's going to last for your whole lifetime. So that might be the state pension. It might be a final salary pension. Or it could be an annuity. But make sure you know you're going to be able to cover that for as long as you live.
And then you can use some of your other investments to think about the nicer stuff, the holidays, et cetera and how you want to dip into those. It's also really important, I think, at the start when you're looking at how much, you need to consider any debt that you have. Using your 25% tax free cash that you can take from your pension can be a really good way to pay off that debt as you head into retirement.
The second step is then to work out how you're going to fund all of that fund you hopefully are going to have for retirement. So starting off, the state pension most people would have earned a state pension through their working life, if they've been making their national insurance contributions. So you go to gov.uk and check how much state pension you're owed and when you'll be able to start taking that.
Secondly, you should have, hopefully, have some pensions from your working career, either personal pensions or workplace pensions. So it's worth thinking about all of the different places that you've worked and making sure that you know exactly how much you owed in all of your different pension pots.
And then finally, you need to think about any other investments that you have. So you might have cash ISAs and other forms of savings. Or your property might be an investment. And those things could all be used to fund your retirement.
So you've got your spending, you know what assets you've got, how are you going to fund your time, and you need to match those up. So as I said earlier, how are you going to fund your essential spend? Perhaps that's with you state pension and then maybe you're going to use some of your other investments for the nicer to have things.
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You’ll start by looking at how your household spending is expected to change when you retire. Are you planning to move to a smaller house or a cheaper area? Maybe your mortgage will be paid off? Or you won’t need two cars, or to pay for travel to work? Maybe you won’t need a car at all, and you will get free or cheaper travel due to your age? Will you be spending more on leisure such as hobbies and holidays? Maybe you have work expenditure such as travel, lunches, clothes or equipment, that you’ll no longer need?
Using your bank statements and looking in detail at what you spend now, plus thinking about what you will be doing when you retire is a good starting point. The next part of the course will help you do this.