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Why you need to ensure you have enough for all 4 stages of your retirement

Modern retirement is different from previous generations. Not only are you likely to have more flexibility and choices than ever before, but your savings are also likely to need to last longer.

According to the Office for National Statistics (ONS), men aged 65 years in the UK in 2020 can expect to live, on average, a further 19.7 years. Women can expect to live a further 22 years.

A 55-year-old man in the UK now has a 1 in 10 chance of living to the age of 97. A 55-year-old woman now has a roughly 1 in 15 chance of living to the age of 100.

What all this means is that your retirement income could have to last you 20, 30 or even 40 years. So, it’s vital you plan carefully to ensure you have “enough” for later life.

The 4 stages of retirement

Your retirement is likely to fall into four general stages. At each point, your income needs will likely change, which is why it’s so important to plan for each of these phases of later life.

  1. Active and busy – By having more time on your hands to spend money, your spending may be highest at this time as you tick items off your “bucket list” while you’re still relatively young and healthy. Your income at this stage may also be supplemented by consultancy or part-time work.
  2. Enjoying your retirement in the traditional sense – As you start to slow down, your spending will likely decrease as you travel and socialise less. Pottering in the garden and spending time with family will typically reduce your cost of living.
  3. Later life – This is where your expenditure on care or medical bills may rise. You may need to undergo medical procedures or recuperate after surgery. You may also be more susceptible to illness and require some level of care.
  4. End of life – The final phase is when you plan to start passing your wealth to your heirs before you pass away and avoid as much of the hefty Estate Taxes (Inheritance Tax) as possible.

Typically, in summary, the first phase is where you’ll have the highest expenses. Then you reach the “lowest cost” phase before expenditure starts to increase again because of the costs of care or medical bills. Finally, you potentially face the biggest cost of all, which is a large tax bill on your death.

Navigating these various phases without running out of money can be tricky. It’s why working with a financial planner can be of huge benefit.

Indeed, research published by Money Marketing shows that people who didn’t take advice at retirement were three times more likely to deplete their fund too quickly than savers who had taken financial advice.

Your personal circumstances need a bespoke plan

When thinking about how much money will be “enough” for your retirement, the key consideration is the type of lifestyle you want to live, how you plan to help your family, and how much you want to pass onto your heirs.

Everyone is different. If you want an expensive new car every couple of years and to travel the world in style, you’re going to need a lot more in your fund than someone planning to live a more modest life.

The amount that constitutes “enough” will be different for everyone – but that doesn’t mean you can’t work out how much you need. And, while there may be lots of unknowns, we can help you to plan for it.

Some of the variables that could affect your retirement fund or spending might include:

  • The state of the economy and of global markets. What if there is a downturn after you have retired?
  • Inflation may be very high, so your cost of living is rising more sharply than expected. Your bonds and the cash you have in the bank might not be able to keep pace with inflation.
  • You might have one-off expenses, such as paying for weddings, or helping your children through university or onto the property ladder.

Of course, these “what ifs?” can happen at any time. However, in your retirement, when you’re likely to have a reduced capacity to generate additional income or time to recover from a market correction these factors can be more immediate.

Cashflow planning can help you plan for “what if?” scenarios

Cashflow planning can give you a good idea of your financial future, whatever stage of life you’re in. It provides a practical way to help ensure you have enough for your retirement – whatever happens.

Essentially, we plug in all your income, assets, expenses, and your projected lifestyle, and model what your financial future will look like.

Crucially, this approach also lets us stress-test a range of scenarios such as stock market volatility, high inflation, and one-off expenses. This means we can ensure any plan we have is robust enough to cope with unexpected shocks.

It may be as simple as “will I run out of money?” Or, it may be more complicated and consider what happens if there is a market downturn just at the point you retire, or later in life.

One of the key areas it’s important to stress-test is your own longevity.

As you read at the start of this article, your retirement could very easily last many decades. So, you need to plan that you have enough to last you through all four phases of retirement, but that you don’t die with too much and leave your heirs with a large tax bill.

Our sophisticated cashflow modelling can cope with a wide range of variables. Seeing your financial future in black and white can genuinely be life-changing. It can empower you to make positive decisions about your future, safe in the knowledge that you have considered all the possible “what if?” scenarios.

Get in touch

When it comes to enjoying the life you want, guesswork will only take you so far. So, if you want to map out a firm, stress-tested financial plan for the future, get in touch with us.

Email info@bmpwealth.com or call +852 3975 2878.

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