We’re continually reminded that we need to have a retirement plan. But it’s clear that for someone in their 20s, planning will look quite different from someone in their 50s. And what about for someone who’s already retired? Let’s take a look at the three main stages of retirement planning.
Early career: Start saving
For most young adults, a retirement plan is something to worry about later. There’s just too much living that’s more pressing: making ends meet, buying a home, starting a family, seeing the world… All these things are a big drain on your finances. And in the early stages of your career, finances are often tight. Luckily, employers are now obliged to arrange a pension plan for their employees.
The important thing is to get into the savings habit. Trying to map out the rest of your life from such a young age is as hard as trying to predict the weather in a year’s time; so much could change between now and then. Of course that’s true up to a point at any age, but the younger you are, the more uncertain the future becomes. So often the best retirement plan if you’re young is simply to make sure you save a reasonable amount each month. What’s reasonable? Probably a bit more than you think you can afford!
There’s one group of young adults who don’t see retirement as a long way off. Followers of the FIRE movement aim to live frugally and retire early. FIRE stands for “Financial Independence, Retire Early”. Of course, the richer you are, the easier FIRE is. For someone earning £100,000 per year, frugal living would seem like riches beyond the dreams of avarice compared to someone earning £15,000 per year. The way to achieve FIRE is to adjust your spending habits to a level that’s sustainable before and after early retirement, and for the rest of your life.
The principle of sustainable spending holds true even if you don’t expect to retire early.
Mid career: Make a retirement plan
Once you’ve established yourself in your chosen career, you’re in the period of your greatest earning potential. You should hopefully have significant disposable income. This should mean you have more options than when you were younger. Retirement may still be a way off, so you’ve now got time to plan for it; and plan for it you should. With high disposable income comes the temptation to spend unsustainably. If you do that, retirement, when it eventually comes, will be big shock; it will be like falling off a cliff.
It’s time to start saving in a more structured way. Unlike in your earlier career, by now you should have a realistic idea of your income potential. This makes lifetime planning feasible. Many people think that the key to lifetime planning is to choose the right investments. But there’s something far more important: that’s to find out what level of spending you can sustain in the long term. If you spend too much now, you risk poverty in retirement. If you spend too little now, you may end up hoarding more wealth than you’ll ever need. You should consider your investments to be part of the means to support your long-term spending plan. Other factors include holding your investments in the most tax-efficient manner. And to frame it all, you need to understand your own goals and motivations.
This is the best time to start using our unique retirement planning calculator. It will help you shape your spending and investment strategy in order to achieve your lifetime goals. EvolveMyRetirement® uses advanced techniques under the hood to optimise your retirement plan. You can then revisit it as your circumstances or goals change.
Retirement and beyond: staying on track
You might think that at some point planning retirement becomes redundant. What if you’ve already retired, or have already made major pre-retirement decisions? In fact, you should never stop planning, just adapt your plan to changing circumstances. For some, retirement isn’t black and white; some prefer to wind down wage earning rather than suddenly stop.
If you’re lucky enough to have an index-linked defined benefit pension that covers all your spending needs, then it’s true there’s less planning required. But there’ll probably still be some, if you have additional savings and investments. If you’re dependent in any way upon drawing down investments, then your retirement plan should be reviewed at least once a year, if not more. Personal circumstances and spending needs may change. Investments may rise or fall significantly. Your legacy goals may have shifted. There may be better annuity rates available than when you were younger.
This stage of life requires the most structure of all, since there’s less time to correct mistakes. We designed EvolveMyRetirement® so that it can continue to play a valuable role in gradually adapting your retirement plan after you’ve retired.
Only just joined, impressed so far but I’m curious about your “staying on track” comment. Can you elaborate on that a bit ?
In otherwords, once retired, how can I tell if I’m over/under spending (or other factors changing) that increases the risk of running out of money ?
Is the idea to periodically update the fund values and re-calculate ?
Thanks.
Thanks for using our app, Peter.
You’re correct, sometimes it’s a good idea to adjust your plan settings and values and to re-optimise, whether before or after retirement. Whenever you optimise, the app bases its decisions on probable and possible outcomes. It doesn’t predict the future, but takes many possible futures into account. You can see random examples of these by running random scenarios, which can be very different from your average scenario.
Once your finances have deviated significantly from the average scenario, the probabilities will have changed. Deviation could be for many reasons, such as investment performance, long-term investment/inflation outlook, health issues or income changes/prospects. It then makes sense to re-optimise rather than blindly stick to the original strategy.
Even the simple the passage of time changes the probabilities, since your life expectancy depends on your present age. For example, if your average scenario is based on an average life expectancy of 20 years and you survive for 5 years in reasonable health, then your life expectancy will not have reduced down to 15 years, but will probably be somewhat longer than that.
If you’ve enabled the setting to allow the system to vary your discretionary spending, then it will do so based on deviation from the average scenario, using a rule of thumb that you can read about on out support page (Q&As). But no rule of thumb can be optimal, so once reality has overtaken projection, re-optimisation will make sense.
Many thanks Nick for your reply.
So have you thought about a possible solution to generate alerts ? For example, if actual fund growth is less than expected, an early alert of this would be useful so that spending could be reduced for a period.
It will be better to know sooner rather than later that the chance of running out of cash has increased.
Currently, like many I’m sure, I have a spreadsheet that downloads actual pot values, plots how the various funds could be consumed over time and verifies that the total pot is within an expected range.
Maybe evolvemyretirement could capture actual pot values over time, say monthly, to verify against the plan ?
Capturing investment pot values would be a major enhancement of the app. The app would need to automatically access pricing information for every fund, shareholding, bond on a regular basis. To be personalised, it would need to be integrated with every investment platform and stockbroker. Then for completeness there’s international investments and property values. It would then be a financial super-aggregator. How feasible such an enhancement is, I’m not yet sure. I suspect we’re talking about a different app entirely, but one that might integrate well with EvolveMyRetirement.
In the absence of such a super-aggregator (unless you know of one), maybe we’ll look at spreadsheet integration at some point, to simplify data input.
Changes to personal circumstances would always require manual updates, as would changes to goals, preferences and attitudes. By the way, the app does already remind you if you haven’t used it for a while (unless you’ve turned reminders off).
openbanking springs to mind ( eg I noticed Yolt can see my Nutmeg pension and ISA balance via openbanking ) … although I don’t suppose its adopted wide enough yet, but it looks like its the way the API market is going. I see access to openbanking can be done via companies like https://truelayer.com/ ( from google search ).
At the moment I use javascript get what I need from the pension/isa web sites … but pretty sure you don’t want to get into that 🙂
Yes, spreadsheet integration sounds pretty neat and flexible. I can share a google spreadsheet if interested to illustrate the way I’ve been thinking of post retirement / post planning monitoring.
Thanks Peter, I’ll keep an eye on the banking/finance API space in case a future integration looks worth it. Of course you’re right that we wouldn’t want a piecemeal Javascript hack (you’re presumably a fellow hacker)! I’ll drop you an email regarding file sharing.