Retirement is the third act in life – you learn; you work; you retire.
Some people find the transition easy, but for many, it can be extremely daunting.
Moving from a period of accumulation [saving], where the chart almost always slopes upwards (i.e. you’re building wealth) to one of decumulation [spending], where it goes down as you start to draw on your pension and investments to fund your retirement spending needs, can be emotively challenging, to say the least.
But herein lies the true value of financial planning - building a tangible strategy for retirement and then regularly reviewing and tweaking this as circumstances and objectives change over time.
This blog is the first in a series on retirement planning.
Over the next couple of months, and with every other blog, we’ll be looking at the various components of retirement planning – cashflow modelling; retirement income options; and common withdrawal strategies.
Ultimately, the goal of a retirement plan is to provide people with the clarity to retire with confidence and live out their best lives during this third act.
Analyst, strategist, coach
In the context of retirement planning, as financial advisers, we wear several different hats:
Analyst
Are you on track to have ‘enough’ (income and liquid capital) to meet ongoing spending needs and therefore maintain your desired lifestyle for the rest of your days?
We analyse this with the help of cashflow modelling.
We combine your current financial position with various assumptions for inflation, investment returns, residual earnings (for those ‘partially retiring’ or with some form of earnout for example), other income sources, spending, etc., to project your future financial position.
In turn, this enables us to assess:
- When can you afford to retire and still maintain your desired lifestyle for the rest of your days?
- If the answer is immediately, how much extra can you afford to spend (or gift) each month and still have ‘enough’?
- We’ll also stress test the analysis for more adverse economic and personal conditions (e.g. lower investment returns; higher inflation; additional expenditure, etc.).
Another key benefit of cashflow is the ability to model alternative scenarios – parallel worlds if you like, reflecting certain actions (e.g. downsizing, second career, etc.) or changes in assumptions (change in risk tolerance, retirement date, etc.).
Cashflow modelling is an essential tool in any retirement planning process and one we’ll regularly review over time.
In the next blog, I’ll provide an example of what this looks like in practice.
Strategist
Next, we’ll help build an income strategy for retirement – how much you draw on a monthly or ad hoc basis, and from where (i.e. which pot do you access first).
This is very much bespoke to each individual but comes down to a blend of:
- Salary replication – most retirees desire some form of salary replication, i.e. a regular and consistent monthly income, rather than this being intermittent or variable,
- Tax efficiency – we’ll ensure any income is structured in a highly tax efficient manner, spanning income tax, capital gains tax and inheritance tax,
- Risk management – a key aspect of any retirement income strategy is in the degree of investment risk you’re willing to accept for residual funds. This relates to pension savings and whether to draw on these savings via flexi-access drawdown or annuity purchase (or a mix of the two).
As noted earlier, this is such a vast area of financial advice that we’ll be covering different income options and withdrawal strategies across multiple blogs over the coming months.
Coach
Our advice will also delve into the non-financial aspects of retirement planning.
We draw on our experience of helping many other clients through their retirement journeys. We’ll act as a sounding board for your retirement plans and will subsequently ‘hold your feet to the fire of your best intentions’, i.e. making sure you do the things you said you would.
A good first step for those considering retirement is to ask the following questions:
- Have you had enough, of a particular job, sector, or work in general, and
- Will you have enough to do in retirement, to stay mentally active and maintain the sense of purpose that comes with more structured work?
Step 1: what does your retirement look like?
For those considering retirement, the most important first step is to think about what your retirement looks like – what do you want to do, with whom, and when?
But this can be harder than it sounds. That’s because, for many of us, our future retired selves are a far cry from our current versions.
We spend so much time working that it can be hard to know what we’ll do when presented with a vast increase in free time, not to mention what that will cost.
This is where the coaching aspect comes in – unpicking what clients value most, what they want to do more of, and then trying to quantify this into a tangible spending goal.
‘First year blowout’
Expanding on this final point, a strategy I like, and as long as this sits within the boundaries of affordability, is to have a blowout first year.
Try everything! Go on that major holiday; take the family away to that cottage in the Cotswolds; walk the South West Coastal path; learn that new skill; do a bit of volunteering, whether that be at a local charity or picking up litter at Glastonbury, and so on.
There are financial limits to this – we mustn’t bust the plan in the first twelve months, but we encourage clients to be adventurous.
The idea here is that this will give you a good idea, fairly quickly, of what you truly value. We’ll subsequently sit down after that first year and unpick this – what did you enjoy most and want to do more of?
As Hunter S Thompson wrote:
“Life should not be a journey to the grave with the intention of arriving safely in a pretty and well-preserved body, but rather to skid in broadside in a cloud of smoke, thoroughly used up, totally worn out, and loudly proclaiming "Wow! What a Ride!”
Disclaimer: Please note, a pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. Since I don’t know your specific situation, none of this information should be construed as tax or financial advice. It is not an offer to purchase or sell any particular asset and it does not contain all the information which an investor may require in order to make an investment decision. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.
