Imagine a lazy Tuesday with nothing more pressing than deciding between a cup of tea, a glass of wine, a sleep, or all three!
For many, this encapsulates the dream of early retirement - escaping the relentless pace of the work world and replacing it with the autonomy of ‘choice’. Achieving this idyllic state isn’t simply a matter of quitting your job - it’s recalibrating your entire financial strategy and potentially your life strategy.
People are living longer. While that’s fantastic, it does introduce the challenge of making sure your retirement savings last. Despite recent studies showing that the four per cent target of drawdown income is sustainable, you might consider drawing down less than the typical four per cent from your pension pot annually, especially if your retirement could stretch beyond the 30 years. It’s about making sure your finances are as long-lived as you are.
Navigating taxes doesn’t get easier just because you stop working. Understanding how to withdraw from your pension funds can significantly impact your tax bill. There are plenty of options. Utilising your personal allowance and starting to draw your pension, while still in a lower tax bracket, can help minimise liabilities.
Retiring just as the market takes a nosedive is like parachuting into a storm. It’s known as sequence of returns risk and poor timing can jeopardise the longevity of your savings. Ensuring your investment portfolio is well-balanced and prepared to handle market fluctuations is crucial, particularly in the early years of retirement.
Inflation is like the rain on your retirement parade, slowly eroding the buying power of your savings. You need to be confident in the abilities of your fund manager who is now managing the largest proportion of your money you have ever had, for the longest period and those assets need to outpace inflation. The best managers know which assets will do that and how to protect you with inflation busting funds.
Defer your state pension? It might be okay if you are a higher rate taxpayer in the first year and wanted to mitigate that extra tax, but deferring it only increases your state pension in year two by 5.8%. You would have lost that first year’s income but would benefit from the higher income thereafter. You would have to live over 17 years to receive the money back that you missed out on in the first year.
Moreover, if you had taken the first year’s income and invested it at say a 5% return, it would be worth £26,616. It’s down to your health and longevity for sure and it’s a choice only you can make.
Sure, retiring early means no more commuting or endless meetings, but it also might mean living on a tighter budget. Is it feasible to maintain a fulfilling lifestyle with less income? Testing out your retirement budget before you leave the workforce is essential - make sure it allows you not just to survive, but to live appropriately.
Stepping away from a career can also mean a significant shift in your social life and personal identity. Our nine emotional needs are often not met after we retire – feeling part of a wider community, a sense of competence and achievement, attention from society, the need to feel stretched, are just four of the nine that will take a big hit and that has damaging psychological impacts which need to be thought through.
How will you fill your days to remain mentally and socially engaged? Whether it’s pursuing hobbies, volunteering, or part-time work, having a plan can make all the difference in enjoying a rich, fulfilling retirement.
Ensure your will is updated and set up lasting powers of attorney to save your family the most horrific stress at the most horrific time.
With careful planning, you can ensure your retirement is as enjoyable as it is well-deserved. Remember, consulting with an independent financial advisor can provide invaluable guidance as you plot this exciting new chapter.
- Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a financial query call 028 6863 2692 or email info@wwfp.net