Preparing for the Retirement you Dream of

Planning for retirement is essential to secure the future you envision.

With the ever-changing economic landscape and personal dreams for a fulfilling life post-work, understanding and preparing for the costs and strategies involved is more important than ever. 

The surging cost of retirement 

According to the Pensions and Lifetime Savings Association (PLSA)1, a ‘moderate’ standard of living that includes £55 per week on groceries, a two-week all-inclusive holiday, £10 a week on takeaways and £100 a month to take others out for a meal, could cost a single person £31,300 a year, which is £8,000 more than last year. For couples, £43,100 a year is required to live at this standard. 

Minimum, moderate or comfortable

The PLSA’s Retirement Living Standards report details what levels of income retirees will need to live either a ‘minimum,’ ‘moderate,’ or ‘comfortable’ life in retirement. However, the forecast does not factor in any rent or mortgage payments.

As well as the cost of a ‘moderate’ life in retirement rising, so has the cost of having a ‘minimum’ living standard, which shot up by 12% from £12,800 a year, to £14,400 for a single person and £22,400 for a couple.

A ‘comfortable’ standard of living, where there is more financial freedom and some luxuries, could now cost £43,100 per year for one person – a jump from £37,300 a year earlier. This rises to £59,000 for couples to live comfortably. 

Inflation and more 

The increase in inflation, particularly in energy bills and food prices, over the last few years has contributed to the rising costs of retirement lifestyles. Helping family during the cost-of-living crisis, coupled with people’s expectations of living standards, also played a part. It’s important not only to focus on your current needs, but to provide for the future and to understand how much you need to save for the standard of living you want in retirement. 

How would you like your retirement to look?

To enjoy a financially secure retirement, it’s important to spend time doing some in-depth thinking well in advance to determine your goals and requirements in order to achieve the lifestyle you dream of. 

You need a robust financial plan 

When thinking about the income you’ll need in retirement, many people find it helpful to think in terms of Maslow’s renowned Hierarchy of Needs. His pyramid has various levels of need that human motivations move through, starting with the physical requirements for human survival, and ending with mankind’s highest aspirations, reaching ‘self-actualisation’ at the apex of the pyramid. 

Adapting this approach to personal finance was pioneered in the US. Using this hierarchical approach in a personal finance context can be a useful tool in deciding how to plan your income in retirement. 

Survival income
This is the base of the pyramid and consists of the income you need to pay all your basic household expenses, your regular bills and running costs. 

Safety income
The next layer up, this is the amount you might need to meet life’s unexpected events, such as health and later-life care costs, loss of income and any emergency financial help you might want to give your family. 

Freedom income
This layer is all about assessing the likely cost of doing all those things that you never had time to do before you retired, including travel expenses, major purchases or indulging yourself in other ways. 

Your ultimate ‘bucket list’ 

Many people add a gift layer representing money they want to pass on to children and grandchildren during their lifetime, and some add a dream layer, their ultimate ‘bucket list,’ to the very top. 

The apex of ‘self-actualisation’ represents the ultimate in reaching your full potential, being self-fulfilled and enjoying peak experiences. Maslow described this level as the desire to accomplish everything that one can, and “to become everything one is capable of becoming.” 

By viewing your retirement finances in this way, you can gain a clear picture of how much money you’ll need to help you enjoy the retirement you’ve always wanted.

Developing your retirement strategy

Whether you’re nearing retirement, or you still have many years of your working life ahead, careful planning is essential to secure financial stability and peace of mind when you stop working.

Early planning

According to a recent report2, individuals on average begin actively planning for retirement around the age of 36. At this age, 63% of respondents expressed confidence in their financial decision- making abilities, a notable increase compared to younger demographics where only 56% share the same level of confidence.

With more than a decade of work experience under their belt by age 36, the ‘age of responsibility’ arrives for many people, with increasing awareness of the importance of financial planning, including actively thinking about their retirement. Whatever your age, a well- thought-out retirement strategy is a must!

Decades to go?

Younger individuals can afford to adopt a more aggressive investment approach with their pension pot, embracing riskier assets for potentially higher returns over time, if they are comfortable doing so.

Although this strategy does involve exposure to short-term market fluctuations, the longer investment horizon allow sample time for recovery from any downturns (during which monthly pension contributions may be invested at the cheaper asset prices).

If you’re closer to retirement

For those on the cusp of retirement in the next few years, a prudent approach involves creating a smooth, non-volatile investment profile which minimises risk for the first five to ten years of retirement, with the remainder invested in more volatile funds which have the potential to grow over the longer term.

This approach should help to shield your pension pot from the unpredictable nature of market volatility, as witnessed during events like the pandemic or financial crashes. By maintaining a stable portfolio for the initial years of retirement, you minimise the risk, thus safeguarding your financial wellbeing.

How about the ‘inbetweeners’? 

For those falling between these two extremes, a balanced and risk-managed approach is advisable. 

The strategy here is to aim for a balanced mix of stable and more volatile investments, aligned to your risk tolerance and personal financial goals.

Diversifying your portfolio across various asset classes helps mitigate risk while providing the potential for growth.

The importance of rebalancing

Regular portfolio rebalancing is vital for a sound retirement strategy. Market fluctuations and varying asset performances can cause your portfolio to deviate from its original allocation over time. Without intervention, this drift could lead to unintended asset concentration and increased risk exposure.

Taking the next step

Early and comprehensive planning is key to enjoying the retirement you aspire to. By understanding the financial requirements and integrating them with your personal goals, you can develop a strategy that can help you achieve a fulfilling and secure retirement. Get in touch to see how we can help.

1 PLSA, 2024 (https://www.plsa.co.uk/Press-Centre/Press-Releases/Article/Latest-Retirement-Living-Standards-show-change-of UK-public-expectations)

2 https://www.moneymarketing.co.uk/news/people-start-to-actively-plan-for-retirement-at-36/ 

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