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Planning for Retirement

Planning for Retirement - 28.08.2018

By Andy Hearne FPFS

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We all have ideas about what retirement looks like. For some, it’s about good walks at National Trust sites or Afternoon Teas with friends on the Thames, for others it’s about ticking things off the Bucket List and taking that cruise or maybe seeing the world via Business Class. Perhaps for you it’s about giving something back to society with some charity work or possibly even buying that Aston or Bentley! For most, it’s simply about more time with those who matter.

Whatever your plans are, saving for retirement is one of our greatest financial goals and, besides your home, your pension savings are likely to be your largest and longest-term financial asset. With this in mind, it’s never too early or too late to get serious about retirement planning. There’s a wide range of important considerations and my aim here is to explore a few of the key points.

Accumulation
We affectionately refer to the stage of saving for your retirement as the ‘Accumulation’ phase. The goal of this phase is to save, invest and grow enough money to achieve true financial independence one day, i.e. when you will no longer need to work to earn a living and can comfortably afford to cover your expenses and lifestyle requirements for the rest of your life.

During this phase, it’s important to:

• review your investments and pensions regularly and assess these against your overall retirement goals
• explore how much you can afford to save and/or should be saving for your retirement
• consider ways to harness tax-relief and any matching contributions from employers
• consider the appropriate level of investment risk, asset allocation and investment funds (if applicable)
• review the ongoing charges being applied to your investments and pensions

Decumulation
Once you stop accumulating and start to take an income or withdrawals from your pensions, this becomes the ‘Decumulation’ phase. Having worked so hard to save and invest over many years, this phase can feel counter-intuitive, because here begins the stage of withdrawing money and possibly seeing the value of your hard-earned savings start to reduce. For a fortunate few, the Decumulation phase surprisingly sees the combined value of their investments and pensions increase, because the growth/return achieved outpaces the rate of income/withdrawals required to cover their expenses and lifestyle requirements.

During this phase, it’s important to:

• review your investment and pensions regularly and assess these against your income, expenses and lifestyle goals
• explore how much you can comfortably afford to withdraw, also taking into consideration potential Care Fees
• consider the appropriate level of investment risk, asset allocation and investment funds (if applicable)
• review the ongoing charges being applied to your investments and pensions

Your number
No matter which phase you are in, it’s important to know what your number is. This is the amount that you would need in your combined investments and pensions to be able to comfortably cover your expenses and lifestyle requirements for the rest of your life without having to work.

At FPP, we harness some comprehensive software to help us map out your financial future based on every aspect of your finances and lifestyle goals. This is known as a Lifetime Cashflow. In return, we are able to establish how much you would need to become or remain financially independent (your number). This can be really useful because it puts everything into context and enables you to explore your options and formulate a tangible plan. It also provides us with the facility to model various what-if scenarios. Some of our clients have found this extremely helpful when looking to sell a business, because it can help you to consider whether now is the right time to sell or whether an offer on the table would be enough to meet your personal goals.

Financial independence
Financial independence does not necessarily go hand in hand with retirement itself. Nowadays, instead of retiring on a given date, many people prefer to phase into retirement by reducing down to 3 or 4 days per week initially. Alternatively, you may consider taking a pay cut, so that you can pursue your dream job in the years leading up to your full retirement. Recent changes to pensions legislation have made pensions much more flexible, which means that your pensions could potentially be utilised during low-income periods to make up any income-shortfall.

From another angle, pensions typically can’t be accessed for income/withdrawals until the age of 55 and the State Pension won’t kick in until the age of 65 or greater. However, this does not mean that you can’t retire if you are younger than 55, because there are ways to bridge the gap until age 55 by utilising any other savings and investments.

For our typical clients, investments such as Stocks & Shares ISAs, Investment Bonds, Buy-to-Let property and/or equity in a business can all contribute towards your retirement goals and all of these should be taken into consideration. Pensions also fall outside of your Taxable Estate for Inheritance Tax purposes, so ironically, in some cases we recommend that clients draw on other investments (which reduce the Taxable Estate) rather than their pensions, which could pass on to beneficiaries free of Inheritance Tax.

Investment strategy
Pensions can invest in almost anything you can think of, but this volume of choice inevitably includes the good, the bad and the ugly. Whether you are accumulating or decumulating your retirement savings, when we help our clients to review their pensions, we only seek to take risks that are worth taking and we employ some important strategies to help get the right balance of risk and reward for you (see our article on Risk and Reward).

Retirement Spending Curve
During retirement, we typically require greater income/withdrawals in the early years, whilst health is on our side and our partner/spouse is still with us. As we get older, our health becomes more limiting and our spending typically reduces for a while, but as we get even older, we become more dependent on others and may even need to pay for costly Care Fees. For these reasons, we often describe the retirement spending curve as U-Shaped. Accounting for these anticipated changes can be far from straightforward, which is another reason why we utilise a Lifetime Cashflow to help us anticipate and manage these changes.

Summary
Retirement Planning needs to be explored within the context of your overall affairs and everyone is different, so it’s important to consider all your available options and plan accordingly.

If you would like some help putting your investments, pensions and retirement goals into perspective, please get in touch.

T: 01344 778990 • E: andy@fpp-ifa.co.uk • W: fpp-ifa.co.uk
A: 19 Wellington Business Park, Dukes Ride, Crowthorne, Berkshire, RG45 6LS

This article is for information purposes only and should not be construed as financial advice. Past performance is not a reliable indicator of future performance. The value of investments and income from them may go down. You may not get back the original amount invested.

Financial Planning Partners Ltd is authorised and regulated by the Financial Conduct Authority. Financial Services Register No: 301132 https://www.fca.org.uk/register.

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