The key to maximising your retirement income in the future is in understanding your financial position today. At whatever stage you are in your employment journey, your planning for retirement will benefit from the creation of a retirement cash flow plan.
Recent ONS figures shows that the average retired couple received £610 per week, a take home salary of around £31,000 per year. While couples will be able to claim a weekly state pension of £231.90, that leaves a shortfall of £379 a week, or £19,661 a year. To fill this gap, couples will need a combined pension pot of over £300,000 (based on current annuity rates) - much higher than the UK average.
A cash flow plan brings together your current assets, investment plans and estimates for growth to generate an accurate cash projection on retirement. This simple financial plan will help you understand where you need to make changes to achieve the results you want.
Here are 6 steps to creating your personalised retirement cash flow plan:
1. Set your retirement age
Whether you're planning for early retirement or happy to carry on working, the first step in creating your cash flow plan is to decide at what age you want to retire.
While you may choose to retire early, remember that from April 2016, under the Government's new pension rules, men and women will need to be 65 years old before they're entitled to claim the state pension. This could put pressure on your own pot. And by 2018 you'll have to be 68 years old in order to claim the state pension.
2. Assess your required income
You'll need to consider what amount you and your partner (if planning for a couple) consider a necessary amount to retire on comfortably. The traditional rule of thumb is two-thirds of your salary to maintain your current lifestyle, but only you can decide what is reasonable.
When calculating your retirement budget it's likely that large expenses like mortgages will have been paid off.
3. Watch out for tax
Whatever income you generate in retirement will be subject to tax once it exceeds a basic threshold. There are many ways you can structure your assets to reduce this including using capital gains allowances, ISAs, tax free income from pensions as well as structuring your assets intelligently between spouses. The right steps vary based on your personal circumstances but every pound saved in tax is like an extra pound of income and can make a big difference.
4. Understand the impact of 'one time' events
Take a second to consider any big expenses you may have planned. A new kitchen, daughter's wedding or that 'trip of a lifetime' are all planned events that could have a big impact on your retirement cash flow projections. Many expect to enjoy the 25% tax-free withdrawal allowance on pensions, but spending large amounts of your retirement income could have a serious impact.
It's wise to be realistic with costs, and the impact this capital could have on your retirement cash.
5. Understand your current position
Now you've set your targets and recorded any expenses, it's time to crunch the numbers. Calculating the future value of your investments and projected values of all pensions will help you paint a realistic projection of what kind of retirement income you can expect.
When looking at your current retirement planning, take the time to look at platform costs, annual management charge, dealing costs and all other expenses that can affect your projected income. These can all add up.
At this stage, using online calculators, you can map your current projected retirement income against your retirement plans. It's likely that, for most of us, there will be some gaps. But it's not too late.
6. Take action
Your cash flow plan will allow you to see any gaps in your retirement planning - and give you a chance to address them.
Now is the time to take action.
Whether you plan to retire in five or 35 years' time, taking a hour or two to create a simple cash flow plan is the first step to enjoying the kind of future that you want.
As part of the Flying Colours service, you'll receive a comprehensive cash flow plan to help you make the best decisions about how to manage your money. For more information call us on 0333 241 9900.