There’s a lot to consider when thinking about when you can afford to retire. You need to look at how much money you have saved, and what income you’ll be able to get when you’re no longer working, as well as how much you’ll actually need to live on comfortably.
How long will retirement last?
It’s impossible to predict exactly how long your retirement will last, but you need to make sure you budget for long enough so that you don’t run out of money in your later years. Retirement can last over thirty years, depending on when you retire and how long you then live, so you need to make sure you plan to cover yourself financially if you do live that long.
How will your budget change during retirement?
When you retire, your budget will change. Suddenly, you won’t have your normal salary coming into your bank account, so you need to weigh up the difference between what that would have been against your new pension income streams.
You also need to think about how much money you’re going to need in retirement. Any work-related costs will probably end, but your household bills may go up as you spend more time on yourself and your home. Plus, there’s the chance you may need care later in life, which you may want to set aside money for.
Anyone who has made at least 10 qualifying years of National Insurance contributions (whether you’ve paid it yourself, or you were getting credits) is entitled to the State Pension. The new State Pension applies to any man born on or after 6 April 1951 and any woman born on or after 6 April 1953.
The age you can claim the State Pension from is changing, rising up to 68 years old eventually and potentially further as it is reviewed. Your start date will depend on your date of birth and gender, but you can check your personal details on the government’s website.
The full new State Pension is £175.20 per week, although to be entitled to that you’ve made 35 years of National Insurance contributions. You can boost it by 1% for every 9 weeks that you defer your start, which works out at around £10 extra a week if you defer by a year.
You may be entitled to a salary-related pension from your employer, which is defined by the career salary you’ve earned. This is a regular income that you’re likely to be entitled to from 65 years old, but you can defer it if you want to increase the income.
Most people will instead have a workplace pension pot, that’s been built up over a number of years. Since workplace pensions became mandatory, you’ll have been putting aside some of your salary before tax that you can then access when you turn 55.
Of course, if you don’t intend to retire at 55, you’ll be leaving yourself less money to generate an income. One of the more common ways to generate an income with your pension is to buy a lifetime annuity, which gives you a guaranteed income for the rest of your life.
You’ll essentially trade in the lump sum you’ve built up for a regular payment into your bank account every week or month until you pass away. You can choose how much of your pension pot to use on this annuity – if you want to take a lump sum first to clear debts or buy a holiday, you can. But the higher the pot, the better an annuity you’ll get.
You may decide that your pension income alone won’t be enough to support the lifestyle you wish to enjoy in retirement. That’s when it’s time to consider alternative ways of generating income.
Retirement doesn’t mean that you can’t work, and so you may wish to continue working part-time either in a related field or something more casual where you don’t feel as much stress. By adding a few hours a week, you can generously top up your money to help you get by.
If you have any savings or investments that you don’t plan on giving to loved ones when you pass away, now is the time to start looking at how you can use this to either generate regular income or take a lump sum and spread the cash over your retirement.
If you own any property, you may wish to rent it out to create a regular amount of money coming into your bank, or you could sell it instead and bank a larger sum that you can dip into when needed. And if you have a large enough home that you’re living in, you could consider either a lodger, or selling some of the equity, although seek financial advice before you to in order to help you get the best deal.