“Don’t simply retire from something; have something to retire to.”
– Harry Emerson Fosdick
Ensuring that you have enough to live comfortably during your golden years is something that worries a lot of people all around the world. We don’t want to make the winter of our life any more difficult than it has to be, and for many of us, this is the time to relax and reflect on a life of hard work.
For many, planning for retirement can be quite a bit of work. How much do you need to retire and will it be enough? These are complicated questions to ask.
At Cash Lady, we always want you to oversee your finances. This time, we are here to help you better understand your financial situation, and look at how you can easily save enough to live comfortably during your retirement.
How much do you need to retire?
A lot of the time, people will overestimate how much they need to have saved to retire. Typically, many guidelines will suggest that you should have between 70 and 90 percent of your annual pre-retirement saved.
The money that you will need to have saved will vary from household to household, and depends on various factors – such as lifestyle, and house size.
If you want to see a bit more into your personal situation, Nerdwallet has the best retirement calculator around at the minute. You can work out how much you need to save based on your current age, income and level of savings.
But I can use a pension, right?
A pension is typically the way that most people will save up enough money to retire on. There are two types of pension; defined contribution and defined benefit – with the latter often known as final salary schemes.
If you’re considering a defined benefit scheme, you should look for an employer that is willing to cover your income in retirement, as they will be responsible for doing so. However, you’ll probably also have to contribute to this in some way, and employers will usually set the amount required of you.
For a defined contribution scheme, this works more like a traditional savings account. You will put money into it over time, and build it into a pot of money for retirement. Employers will also usually contribute to this, as a maximum percentage that they decide on.
If you decide on a defined benefit scheme, you will have a relatively simple idea of how much to save. All you must do is contribute as much as your employer asks to get the pension you are promised.
However, with a defined contribution scheme, the answer is usually a lot more complicated. It is your responsibility to put in the money that is required so that you can get more out in the form of your pension.
When you reach retirement, you can keep your pension invested and draw money as income, or buy a regular income until you die in the form of a financial product called an annuity.
What about other investment plans?
Sometimes, however, a pension isn’t going to be enough to live off. If you’re not sure that a pension will provide the best returns on your investment, there are other investment methods to consider.
Investing in property is probably one of the best ways to ensure that you will be supported during your retirement. However, it can involve a lot of work, not just whilst building your portfolio, but also during your retirement.
If you’re building a property portfolio, there are two routes you can take. The first is to gradually move up the property ladder, then downsize to a smaller property during your retirement to free up all the equity that has accumulated in your property over the years.
The major drawback to this problem is fluctuations in the market. If the property prices start to fall, you may be left with less money than you had anticipated or even negative equity. You also have to pay off the interest that accrues on your mortgage.
The second is to build up a buy-to-let portfolio. In this scenario, you typically earn enough from the rent of the property to cover both the mortgage and give you enough to live off.
This is slightly riskier than the first route, as it assumes that you will always be able to find someone to occupy the rental property. Even if the property remains empty, you will still have to cover the mortgage repayments.
Many view ISAs as being a proper, suitable alternative to a pension. As of the 26th of April 2016, every person in the UK has a right to save £15,240 per year, tax-free.
One of the benefits of using an ISA is that all your money is available to you at any time, although this can be a double-edged sword. If there is an emergency, this may come in handy, but if you have poor control over your finances, you may find yourself spending your retirement money quicker than anticipated.
The other benefit of ISAs is that you can have complete control over how much risk you want to put yourself in, financially speaking. You can decide which, if any, investments you want to make.
Many of us look forward to living out our old age free from any workplace commitments. But the reality is that this is not an option for some. Taking a second job can be a good way to supplement your income as you get older, especially as employability laws have become more accommodating.
No matter what your plan is, you should look at sorting your retirement method out sooner rather than later. Nobody likes being caught short.
Need a bit more help with your retirement plan? Leave a comment below, or drop us a line on Facebook or Twitter. If you need finance to help you out in an emergency and you have poor credit, why not consider applying for an online loan through Cash Lady?