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When can you retire?

Planning for retirement can be difficult. With so many “what” and “if” questions to be answered, how can you decide what you need to be doing now, and when you will actually be able to stop working and start retirement?

Retirement is a one of the biggest changes you will go through in life, and as average life expectancy in the UK is now at 79 for men and 83 for women, you need a bigger pot than ever to sustain your retirement and not run out of money.

With State Pension ages being increased, and there likely to be more cuts in the future, individuals need to be more reliant on their own provision rather than the state. The first State Pension in the UK (formerly known as the “Old Age Pension”) was introduced in 1909 for those aged 70 or more. At that time, only 25% of people reached aged 70, and those who reached 70 were only expected to live another nine years on average, so the liability on the state was minimal.

When is the right age?

You may have seen articles or calculators indicating ways to gauge how much you need to save before you can retire. A 5% withdrawal rule is commonly used in retirement models and suggests that if you had a £1 million pot, you could take 5% per annum (equating to £50,000 per annum) and it should last your lifetime.

Following the introduction of pension freedoms in 2015, Old Mutual Wealth conducted a survey, which suggested spending expectations in retirement were £19,700 per annum, and with Aegon recently quoting an average pension size of £50,000 there is a significant shortfall in a lot of savers’ pension funds.

The 5% rule follows a number of expectations, which in reality, are quite unrealistic. It expects returns to be 5% each year, and that you do not take more withdrawals in the early years. In reality, most retirees are likely to spend more in the early years whilst being active and enjoying going on that trip of a lifetime, buying a holiday home and all the things you promised yourself whilst working hard.

The 5% rule can work as a basic rule of thumb, however in reality, surely we need to think a bit deeper into retirement plans, contingency planning and how much to save.

Keep it personal

It is unlikely that you will want to be restricted to a fixed amount each year in order to stick to your 5% withdrawal rule, instead you are probably going to want to fluctuate your withdrawals to allow you to enjoy retirement, and this is why your retirement plan and figures need to be personalised.

  • Have you thought about tax?
  • Are you making use of all the allowances available to you?
  • If your retirement income is all coming from a pension fund, whilst you will be making use of your personal allowance, have you made use of your Capital Gains Tax allowance?

Another consideration is relying on markets performing well consistently, in reality this is rare as markets tend to go up, fall and then go up again. Taking withdrawals when markets have fallen is going to deplete the fund, so have you got other sources of income which you could draw on at these times. Perhaps you have cash savings which could be used during these times.

Having different pots to draw on can make a huge difference to your retirement portfolio by maximising tax efficiency and allowing you to avoid depleting the fund when markets drop.

Importance of Planning

Apart from mass savings and investment returns being on your side, the main way to help achieve your retirement goals in from good financial planning. Making wise choices early on can help you to reach your goals, and allows you to review your position frequently so you can review your progress and see that you are on track to achieve your retirement goals.

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This material is for information purposes only and does not constitute an invitation, offer or solicitation to engage in any investment advice or recommendation, or an offer of solicitation for a transaction in any financial instrument. The material may not be suitable for you, and you should therefore always seek professional independent financial advice before making a decision to invest in any product. The information provided and contained in this promotional material is believed to be reliable as at date of issue, but is subject to change without notice and makes no representation as to the completeness or accuracy of the information or of any opinions expressed.

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