In a previous article, we discussed how you can calculate your target retirement income by looking at what you want to do when you retire and how much income you will need to afford your planned lifestyle. The next stage is to look at the resources that you have available and whether you have a shortfall.
- From your target retirement income you can deduct guaranteed incomes such as state pension (you can obtain a forecast of your state pension at https://www.gov.uk/check-state-pension), defined benefit pensions and any other income source that will continue into retirement. This will give you your annual shortfall (or surplus if you are lucky!!).
- To compare your annual shortfall against your pension provision, you will need to convert the shortfall to a lump sum. To do this, divide it by 0.04.
- Between now and when you retire, you will hopefully saving for retirement. This may be in the form of a workplace pension into which you and your employer save on a monthly basis, or in some other form. Work out the annual figure and multiply it by the number of years until you retire. Add this figure to the current value of your pensions.
- Deduct the figure in step 5 from the figure in step 4, this is your capital shortfall.
Addressing your shortfall can be done through a number of ways:
- Finding more capital – if you have or are expecting more capital to be available between now and retirement, this can be used to fund the shortfall
- Save more on a regular basis – Allocating more of your monthly income towards your retirement can seem an impossible task, but making savings on items such as insurances, food shopping etc can mount up. Adding these savings to your pension can make a big difference over a number of years.
- Adjust your goal – retiring later or reducing your income in retirement will reduce the amount that you need to save. Make the adjustment and then go back through the steps above to see the effect on your shortfall.
- Improve the investment returns on your pension – This is often the option that people go to first, but the above options can often be more effective. Analysis of the returns generated by the current pension investments and the risk taken is required, which is best conducted by a financial planner.
Very often, the best solution involves some or all of the above options to get the best result.
This is intended to give you an approximate guide for planning for retirement. Factors such as different rates of inflation, return, taxes etc will all affect the plan and a financial planner will be able to help to build a more realistic plan.
If you would like to speak to a member of WBW Chartered Financial Planners about a retirement plan or any other financial planning related queries that you may have, then you can arrange a free telephone consultation for this week only as part of CISI’s Financial Planning Week 2019. To arrange a free consultation, please call 01626 202340 or email email@example.com.