Budgeting For Retirement
Budgeting for retirement tends to be a one off exercise as individuals approach the date they would like to retire. That could be a mistake. Even if it is a rough first stab the earlier a budget can be prepared the better. Then if there is a shortfall between what is needed and what is available there is more time to do something about the issue.
If you have a Financial Adviser they could help by checking your budgets against your pension entitlements and other assets. They will often perform this task yearly and bring any issues to your attention. If you are taking the DIY route there are some basic questions you need to ask yourself including (but not exclusively):
- How much income will you need to cover your fixed outgoings each month in retirement?
- Estimate your discretionary spending including future grandchildren
- What will you need to set aside to replace (or repair) major items like cars, or domestic appliances?
- What will you have left (if anything) to fund the lifestyle you had hoped for. Perhaps you would like to support family and/or leave something to beneficiaries on your death.
Your Outgoings In Retirement
You will need the essentials (somewhere to live; heat, power, water, etc) and that means there will be bills to pay every month. You will need food and probably your own transport (and associated costs). The price of all these items are likely to increase at (or above) the rate of inflation each year. And don’t forget any income or capital gains tax implications.
Starting with what you spend now it should be possible to estimate what your monthly outgoings will be in retirement. Hopefully you will be fortunate enough to enter retirement debt free but don’t forget to consider it. Servicing debt can be a major drain on retirement funds. In particular credit card debt can be a problem. A credit card debt of £3,000 could mean minimum payments of circa £70 each month. If you were to only pay the minimum amount each month it could take 20 + years to clear the debt.
Asset replacement fund
Given recent history, it is easy to assume property will increase in value each year but history is not a reliable indicator of the future. Even if your property does increase in value some maintenance costs are inevitable.
Other assets such as cars will certainly decrease in value over time and will need to be replaced. A male in good health aged 65 in 2017 could expect to live a further 18 years on average. Cars and other key assets may need to be replaced at least once in that timeframe.
Any retirement planning exercise should take account of asset replacement and how that may be funded. It may be cash reserves, withdrawals from pension funds in drawdown or other assets. If you need to manage on a fixed income each month from an annuity or final salary pension it may be necessary to have some cash reserves to deal with unexpected, one off expenses.
Retirement Income Calculations
What income from pensions or other assets can you expect in retirement and how far will it go to cover basic expenses, discretionary spending and asset replacements? Will you have enough to live the retirement you aspire to? Will you have some spare income or surplus capital to support your family if they need help? What will happen to any remaining pension fund on your death, these and many others are all questions to ask yourself.
Don’t forget to to include your state pension entitlement (you can check here) in your income calculations. On a positive note some pension entitlements (including the state pension) are index linked and will increase each year to cover at least some of the impact of inflation.
If your pension funds are not sufficient then there will be some hard choices to be made as part of a retirement planning exercise. The earlier a retirement plan is in place the better. It gives more time to deal with any shortfall.
Funding Long Term Care
There are two major unknowns in any retirement planning exercise. You don’t know when you will die or if you will have major health issues in later life. If the worst happens and you (or your spouse) need long term care it will need to be funded. Local Councils will currently only contribute to care costs when your total assets (including the value of any home you own) fall below £23,250 (in England & Northern Ireland). Care costs can be significant so it’s best to be aware of them and plan ahead.
Budgeting for retirement is an essential part of any retirement planning exercise. Performing at least a rough analysis will reduce the potential for any nasty surprises later on. If you are aware of a potentially difficult situation there is at least an opportunity to take action. We cover all the key points you should be aware of in our free retirement planning guide
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This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action. The past is not a guide to future performance. The value of investments can go down as well as up and you may not get back the full amount you invested. Tax and financial regulations can change. Any figures quoted above are correct at the date of publication.
