More of us are living well into old age and are enjoying a much more active retirement than many of our ancestors have done previously. Some of us are likely to live into our nineties and beyond, and having retired in our sixties this could mean a 35-year retirement time horizon to plan for. Not only are we having to prepare to finance an extended period of retirement, people are now waiting until they retire to fulfill many of their lifetime aspirations such as travelling for extended periods of time, or buying second homes, often having not been able to do these things whilst working.
It is therefore becoming increasingly more important to plan for retirement, and no time is too soon to begin.
The best place to start is by identifying your goals and aspirations and what you would like your retirement to look like. The next step is to look at the likely cost in today’s terms of fulfilling these aspirations and objectives.
Alongside this is also the need to determine how much income you are likely to need each year to maintain your lifestyle in retirement. The easiest way of doing this is to have a clear and accurate understanding of your current annual cash flow. This forms a good starting point from which expenditure that will fall away in retirement can be deducted (such as mortgage costs), and to which additional expenditure can be added (such as the cost of more frequent holidays).
The next step is to understand what capital and other provision you have at the current time and how much is likely to be earmarked for retirement planning purposes.
From this sound and accurate starting point, whilst making several assumptions as to growth rates on capital, tax and long term inflation, it is possible to project how much capital and income you will need in retirement to fulfill all your objectives. You can then determine what shortfall if any there is, and what level of provision needs to be made to make up the shortfall.
Above all, the key to putting together an effective retirement strategy is not to leave it too late!
RMT Ref 92/01.15/SL