If you want to retire in 10 years, here are the steps you should consider now:
- Your basic monthly spending
- Your active years
- Your additional spending
A professional financial planner can design a more detailed cash flow forecast, but the above are the foundations of any retirement plan.
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The basics
Your basic monthly spending is what you need to have a roof over your head, food, heat and clothes. You should also include basic travel costs, to see family and go to the shops.
If you live a long and healthy retirement you will eventually slow down and only need these basics, so that is the baseline income you need.
The active years cost more
In your more active years between now and then, you need that basic income plus money for things such as travel and hobbies.
If your are in good health you can assume you will be active to 85 and live to 90. To have peace of mind in retirement you want a financial plan that covers the basics forever and comfortable funds your active years.
Once you know your current costs, you need to factor in inflation and work out how to invest and or draw pension to fund your retirement for these years. This is where a finial planner can help you.
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Don’t think you need to worry about inflation?
In 1992 a first class stamp was just 25p. Today it costs 95p. If you retire for 20 years you can expect basics to cost four times as much by the end of retirement.
How big a “pot” do you need?
Once you have a sense of the income you need, and how that will increase due to inflation, you can work back to a pension and investment “pot” figure that you need to save over the next 10 years.
Here’s an example:
Stephen and Jane are married, with two grown up children. They are 55, want to retire at 65 and currently have a combined income of £80,000.
After tax they take home: £
Their mortgage has 10 years left, and they want to retire as soon as it is paid off.
Without that their basic monthly costs are:
Their social life, hobbies and desire to go away for two foreign trips a year mean
Their total pension pots, if all consolidated, come to £
Initially they expected that their pensions would be all the savings they needed.
They thought would buy an annuity, but this leaves them short by £x per month through their active years.
After speaking with a financial planner they have decided to save £xx into a SIPP.
Their detailed plan, where they keep their pension in drawdown and invested in a low risk portfolio of stocks and bonds will allow them to enjoy an income of £x through their active years, which is more than they need.
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