Working five days a week for years on end doesn’t feel like a pleasant experience while you’re doing it – most of the time anyway. But at the end of the road is the goal – retirement. Finally, you will have enough money to provide you with a stable income and all the cash you need to continue living your regular lifestyle.
Ideally, you’d like to retire as early as you can. But often financial resources mean that you can’t. You would like to be able to afford it, but your finances say otherwise.
Sometimes, you don’t actually know whether you can retire. Money in a pension fund feels so abstract. How do you know the time has come to draw down on it and give up work?
Do you need to carry on working for several more years? In this post, we will take a look at some of the ways you can tell you can afford retirement.
You Don’t Have Much Debt
Going into retirement with a little debt is okay – you can pay it out of retirement income. But having a mountain of it is a big no-no. Debts will put stress on your savings and undermine your projected earnings from your various funds. It’s better to reduce or eliminate debt first and then retire instead of trying to do it beforehand.
Paying down debt might seem like you’re working longer for no reason. But remember what debt does to your future income – it destroys it.
Also, think about the type of debt you have. Mortgage debt at 3 per cent interest, for instance, is actually under the market rate of return for most pension funds, so it is sustainable. Credit card debt at 20 per cent is much higher than the market rate of return and, therefore, not as sustainable.
You Have A Plan For Big Expenses
When you retire, there’s a good chance that you’ll have to fork out some significant expenses, usually related to the cost of care. Effective retirement planning, therefore, means working out if you can afford to take care of yourself as you enter old age.
Planning for large expenses isn’t as easy as you imagine. Financial experts will often talk about “longevity risk.” Some people who retire at age 65 live for another forty years. And during that time, they may require long periods of treatment or care.
It is unlikely that you’ll live that long of course. But you could face several years of having to pay for care. And that could eat into your funds tremendously. They could even run out entirely.
You Have A Monthly Plan
Before you retire, you should have a monthly plan for how you’re going to use your money. Unfortunately, even though the paychecks stop coming, the bills keep piling up.
Money managers will often talk to you about the importance of cash flow. It is the idea that you always know how much money you will have on hand, month to month.
Remember, with most pension funds; you don’t take out all your money in one big lump sum. Instead, you slowly draw it down, leaving the majority of the capital to continue growing. This way, it lasts longer!
You want to work out whether your outgoing expenses are the same size as your drawdown or not. If they are more extensive, you’ll need to recalculate your retirement income and work out whether your fund is large enough to support it. Again, you might find that you have no choice but to work longer.
You Are Not Accounting For Inflation
Inflation is something that central banks create to keep people productive and always hankering after more stuff. When prices rise, you feel that you need to spend today instead of putting things off for the future.
When it comes to retirement planning, inflation is critical. Living off £25,000 per year sounds okay today. But that same sum of money will be worth much less in twenty years. In short, you won’t be able to buy as much with it. And so you’ll ultimately wind up getting poorer over time.
Ideally, you want a pension income that grows in tandem with inflation. You want something that grows at around 2 per cent per year to be safe.
If you need to work longer before you retire, don’t worry. Work might be a challenge, but retirement isn’t always all it’s cracked up to be. Perhaps never retiring is the secret to a long and fulfilled life?
