- The value of state pensions is not enough to fund the average retirement length
- Retirement costs must be considered in careful detail
- Private income streams should be optimised to increase funds
Back in 2013, banking giant HSBC launched a global survey which delved deeper into the failure of modern citizens to save for their retirements. The research, which canvassed more than 15,000 respondents across 15 countries, revealed that while the average international retirement length is 18 years most citizens only have enough funds to cover 10 of these.
It many respects, this issue is not hard to understand. After all, the average weekly state pension(personal-debt.solutions/start-saving-ret.../) in the UK is currently worth just £115, which is scarcely enough to fund the basic cost of living in 2016. When you also consider the falling rate of home-ownership and continued growth in the private rental market, it is clear that the next generation of retired individuals may need to factor living costs into their monthly budgets.
With this and similar issues in mind, it has never been more important to be proactive when planning your retirement. It is also never too early to set these plans in motion, so here are some of the pivotal factors to bear in mind: -
Consider cumulative living costs and your Post-retirement lifestyle
We have already touched on the impact of basic living and accommodation costs, and the first step that you should take is to determine your post-retirement lifestyle. This will help you to identify and estimate your living expenses once you have left work, which in turn will reveal an annual sum that is required to fund your desired lifestyle and achieve all financial goals.
When attempting this, be extremely thorough and consider every possible expense. Your cumulative costs should include on-going insurance premiums and accommodation fees alongside everyday living expenses, while you should also over-estimate costs to create a financial contingency.
On a final note, keep in mind that you should aim to draw no more than 4% of your assets during the first year of your retirement. This figure can be adjusted according to inflation and your personal circumstances, while such a conservative approach helps you to manage your funds efficiently.
Develop and manage additional income streams to minimise your withdrawal rate
Ideally, you will be able to relax during your retirement and bask in the fruits of your previous labours. This is difficult on a state pension alone, however, while the process of evaluating living costs during your retirement will also have identified any short-fall that exists within your funding.
It is here that you can look to boost your retirement fund by carefully managing and in some instances adding new income streams. This strategy can help to diminish the state pension withdrawal rate, although you will need to appraise such income streams carefully if you are to maintain a balanced lifestyle during your retirement.
The potential income streams that can boost your retirement fund are diverse in their nature, with the cultivation of a private pension plan during your career perhaps the most effective. You should therefore start this as soon as possible once in employment, as you look to take advantage of mandatory government legislation which requires employers to match your pension contributions as a worker. This will come into play in 2018, while those who are pursuing self-employment should also look to transfer these funds when leaving a permanent role in order to initiate a private pension plan.
Factor in risks and Taxes
By now, you will have a clear understanding of your financial needs during retirement a plan that helps you to optimise your income streams. The final stage is to consider potential risk and taxation demands, as these factors will have a huge influence on the success or failure of your future wealth management plans.
While pension income streams come with minimal risk, for example, individuals who look to use investment vehicles such as bonds and dividends will need to have a clear understanding of their finances and risk tolerance. The latter must be based on both your fiscal budget and philosophy as an individual, as this ensures that you can easily manage a pension and investment portfolio once you have finished your career.
On the subject of taxation, you will need to consider individual savings, pension and investment accounts and the demands that they place on your finances. While some apply universal taxes regardless of the initial levies placed on your earnings, for example, others (such as Roth accounts in the U.S) allow for tax-free withdrawals during the course of your retirement.
Identifying whether or not proposed pension plans and investment accounts grow tax-deferred is ultimately a wise move, as this will have a huge impact on your ability to save. Tax-deferred accounts apply levies on withdrawals as though they are regular income, so distinguishing alternatives may help you to optimise your retirement funds.