Retirement Planning: how to begin preparing for retirement. The steps to take before retirement

Retirement planning can seem a bit complicated, a bit dull and too far away to worry about if you’re in your 30’s or 40’s.  However, spending the time and planning your retirement income, or even better, mapping out your retirement incomes, can benefit you and make you richer in later life. 

The sentiment around ‘retirement’ has evolved, as for many people nowadays it no longer means the day they stop working for the company they’ve just spent the last 40 – 45 years at – looking forward to a handshake from the chairman and a gold-plated watch.   

It’s more common to have had many jobs throughout your career, and self-employment is only looking to increase in the UK.  By Q4 of 2019, there were more than 5 million self-employed people in the UK, up from 3.2 million in 2000. 

Also, where we’ve seen retirement develop, was the 2015 changes on how you can use funds in your occupational or private pension. Which means once you reach the age of 55, you have much more freedom to access your pension savings or pension pot and to decide what to do with this money. Effectively, those with a defined contribution pension scheme were no longer forced to buy an annuity.

What age should I prepare for retirement? 

There isn’t a fixed or perfect age to start financial planning for retirement. If you look after your personal finances well during your working life and regard your income as your biggest asset, it’s just the next chapter. 

However, the sooner you think about your financial independent goals (where you stop working, specifically, you stop exchanging your time for money) and outline a timeline, the better off you will be in later life – and maybe you can retire earlier than you think? 

Stats have shown around 46% of people in their 50’s are actually worried about their retirement.  And those in their 40’s, towards late 40’s, 64% are concerned about their retirement income and when they can retire. 

If you have been paying into a private pension and/or have some investments or assets for retirement, a minimum of two to five years before you stop working is a good time to plan and thinking about the choices you will need to make.

Interestingly, financial independence and the FIRE movement – Financial Independence Retire Early – are becoming increasingly popular and many people are setting their goals to give up work and live financially independent long before they can draw their State Pension and even before they can touch their private or occupational pensions at 55 (57 from 2028) 

Also Read: The FIRE movement – Financial Independence Retire Early or don’t retire and just be time rich

Retirement Prep-work 

Make a will – if you haven’t got one already, make a will as it’s essential you know what will happen to your money and your assets. 

Do a fact find on yourself – like any transition there are opportunities to look for and good decisions to be made if you’re organised – as tedious as it seems, whether you have a digital file or paper hard file or a mix of both, pull everything out and organise every policy, investment, pension etc.. It’s often surprising what people find that they’ve forgotten about – building society savings accounts or a pension from an old job.

Private pension statements and tracing lost pensions – having a number of PAYE jobs during your career could also mean, you and your employer at the time started paying into a pension, so you could have one or multiple pensions you have lost track of.  Once you have tracked all your pension’s you can then ensure you receive regular statements coming in. 

If you have lost track of any old pensions, the Pension Tracing Service can help you find them. It is a free service run by the Government.  There are also many great commercial services, like Pension Bee who transfer your old pensions into one new online plan. 

Budget – Produce a budget, if you haven’t already got one, on your current income vs spend.  Then duplicate that and strip out what expenditure is non applicable as you enter retirement, you may have to add some new spend in or up the heating bill.  See what you need income wise, so you are comfortable in retirement.  There are several free budget templates you can access online.

Clear debt – The ideal is to enter your retirement debt free.  Something to work towards.  However, if you have started retirement planning later or due to health or job issues you have to draw your private pension sooner than you hoped, your income is likely a lot less and too many repayments with high interest could mean you don’t have enough money to last you.  It’s advisable to really do your homework and look at the most money and tax efficient way to clear your debt.  

ALSO READ Clearing your debt before retirement

Get a state pension statement – this will give you an estimate of how much State Pension you might receive, based on your National Insurance contributions so far. Go on the government’s website and find out what your state pension will be.  You need to have paid National Insurance Contribution (NICs) for 35 years to qualify for full state pension at £600 – £700 per person per, month. 

However, if you’re not going to reach 35 years of NICs, you can buy years of qualification which are added onto your NI record, up to state pension age.  To find out more go to GOV.UK website.

Pension Wise is a free and impartial service backed by the government since 2015, offering guidance for people regarding pension freedoms introduced in the 2014. You can visit: www.pensionwise.gov.uk or call 0800 138 3944 

Also Read passive incomes and side hustles to boost income in retirement   

SOURCE: *ONS