Thanks to advances in medicine and healthcare, people are staying healthy and active for longer than ever before. This means your retirement years can now stretch to make up a fairly large portion of your life. Everyone deserves to enjoy a decent retirement after a long working life, but it also means that proper planning is now particularly important.
If you are going to be living for a long time after you stop working, you will need considerable savings and income to be able to enjoy a comfortable, worry-free retirement. Planning is the best way to prevent money worries, while also helping you envision a life beyond the everyday routine that work provides.
There are common mistakes that people often make when it comes to planning for their retirement. We have listed some of these below to help you avoid them.
1. Not creating a proper plan
Sadly, the most frequent mistake of all is not making a proper retirement plan.
The people who are most likely to neglect to plan for retirement are those who work and make regular national insurance contributions in anticipation of receiving a state pension when they come to retire. This can lead them to becoming complacent, imagining that there is nothing more that they need to do. Unfortunately, relying on a single pension is not likely to guarantee a happy retirement.
To make this clear, the current annual income that is recommended if you want your retirement to be comfortable is £33,000 for a single adult, or £45,000 if you a couple. The UK state pension, as of now, is set at a little over £9,600 per year. That leaves a pretty significant shortfall and, if you have not planned, you will have fewer options for making up the difference. Furthermore, the average amount needed for a stress-free retirement is likely to rise over the next few decades, and the state pension may well lag even further behind by the time you stop working.
Planning is essential if you do not want to be worrying about making ends meet when you retire.
2. Creating the plan alone
While you should, of course, be closely involved in putting together your retirement plan, creating the whole thing yourself will be a very big task if you are not an experienced and qualified professional. Seeking out retirement planning specialists in Shropshire or wherever you happen to be based is a great way to ensure you have a watertight plan. The best retirement plans regard a pension as simply the first step, rather than treating it as the be-all and end-all of retirement preparation.
Your retirement planner will start by getting to know you, and what your dreams or ambitions are for the late stage of your life. This is important, because it will be difficult to plan effectively unless you have a sense of what you wish to do, and how much money will be required to accomplish any plans you have. Your dreams may change over time, and any plan you make can always be altered, as the relationship with your planner will be a long-term one.
A retirement planner will have in-depth knowledge of everything from the stocks and bonds markets, to the UK tax system that is needed to create a comprehensive plan. Unless you come from that sort of professional background, it is unlikely that you will be able to match such a plan by doing it alone.
3. Not opting for a range of investments
Having a private pension is a good start in planning for retirement, but this is just the start. Inflation can seriously reduce the value of cash savings between now and your retirement date and, if that is all you have, you could find yourself with much less to live on than you previously expected. A good way to avoid falling victim to that mistake is to combine savings with a diverse portfolio of investments, ensuring you consult with a professional first.
This can be across a range of asset classes including property, stocks and bonds. The risk level of these can vary, with stocks being higher risk than bonds, but the aim will be to create a balance of higher risk/reward and lower risk/reward investments. Whichever side your plan tilts towards will depend on how comfortable you are with risk, and how confident you feel in taking this approach. This method is not for everyone.
4. Not saving more when your earnings go up
The quicker you put a plan in place and start to save, the better. A common mistake is to choose an affordable amount to save for retirement each month at the start of your working life and stick with it regardless of promotions and pay rises. As your monthly income goes up throughout your career success, you should raise the amount that you save each month accordingly.
5. Not using tax mitigation strategies
One of the biggest advantages of working out a retirement plan with a professional is that they will know legal ways of reducing your tax burden. An example of that is the self-invested personal pension (SIPP) situation. Existing rules mean that people can opt to receive the money saved in one of those as a one-off lump sum payment. That might sound appealing on the surface, but it is taxed at a rate of 75%, and will also count as part of your overall taxable income for the year, meaning that you could potentially be put into a higher band.
A retirement planner will almost certainly suggest withdrawing this money in smaller amounts over a longer period instead. That way, you can avoid losing much of it to tax, as well as limiting your overall liabilities. The rules may have changed by the time you retire, but an advisor should always make mitigation strategies part of the plan.
6. Underestimating the length of your retirement
As mentioned in the introduction, people are now living longer on average, which can mean longer retirements too. Therefore, a retirement plan should operate on the assumption that you will live for at least 20 years after you stop working, and map out a savings and investment strategy on that basis. It is another reason why starting to plan and save now, rather than delaying this is so important, as you are almost certain to need more than you think to enjoy your full retirement period in comfort and with financial peace of mind.
7. Not considering medical costs
Although we generally live for longer now, health problems are an inevitable part of ageing. They should really come under ‘living costs’ when making up a retirement plan, but too few people seriously consider how medical issues can become a part of everyday life as they grow older. This can range from the expense of treatment for a serious illness to the costs of long-term care towards the end of your life, but it should always be incorporated into a retirement plan.
8. Not assessing all of the annuity options
When it comes to converting the money saved in a pension into income for retirement, many of those who avoid the lump sum payment trap still jump straight into an annuity. This certainly has its benefits. For one thing, it can provide you with a regular post-working income, but the mistake is in taking the very first one that is offered to you.
Typically, an employer will provide the pension annuity option and the error is in just accepting that without checking the terms on offer elsewhere. There can be considerable variance in the rates offered by different providers, and there is a strong chance that your employer will not be the one with the best rates. Any good retirement planner will take the time to find the right one for you. Sometimes, taking the quickest and easiest option is not the best long-term strategy for your retirement.
9. Not reviewing the plan
If you make up a retirement plan at the beginning of your working life, it will need to be reviewed at several points throughout your career. That could be because your career exceeds expectations, which in turn means you can think bigger when it comes to retirement. It could also be because particular investments are under or over-performing. Either way, it is a mistake to view the original plan as something that is set in stone and cannot be adjusted as your life changes over the years.
As you get nearer retirement age, you may want to switch from high to lower risk investments too. You should meet with your retirement planner periodically to re-evaluate the plan.
10. Falling victim to investment scams
This is an increasingly common mistake. Research by the Financial Conduct Authority (FCA) found that close to one fifth of those aged over 55, and one third of those aged 75 or over, had been targeted by scams. The best way to avoid having it happen to you is to stick with reputable companies that have been authorised to offer financial advice. There is an FCA Register of legitimate companies that you can check out, as well as a Warning List of known scammers.
A second tip to avoid being the victim of a retirement scam is to reject all advice that you have not directly solicited yourself. If someone you don’t know unexpectedly contacts you offering investment opportunities, it is wisest to ignore them.
At Hartey Wealth Management, we have been providing high quality and impartial retirement planning advice for more than 25 years. Contact us now if you think you could benefit from our services.