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<\/p>\nIf you\u2019re a natural saver, you may easily stash away a nice pension pot during your working years. Once those pay cheques stop coming in though, your instincts may tempt you to cut right down on your spending. Maybe it goes against your frugal nature to draw down your savings. Maybe you\u2019re a spendophobic!<\/p>\n
If you have a defined benefit pension, then it may not feel so bad to spend it, since you have guaranteed income. But if not, then the thought of dipping into your pension pot or other savings each month may stress you out.<\/p>\n
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To spend stress-free during retirement, your first priority is to have a budget. Ideally, you should work out your budget several years before retirement. You then have the chance to get used to living within that budget before you retire. Once you\u2019ve retired, there should ideally be no sudden changes in your spending patterns.<\/p>\n
Your budget is not just about hard cash though; it\u2019s about lifestyle. You need to cover your essential expenses; but you also need to spend in ways that increase your overall happiness. Once you\u2019ve retired, you\u2019ll no longer have the same social contacts that work gave you. Spending in ways that maintain a good social life is important.<\/p>\n
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If you\u2019re risk-averse, nothing can spoil your retirement more than the fear that you might lose everything in a market crash. Life always entails risk, but knowing how much investment risk you can afford to take is the key. The right amount of risk for you depends not only on your personal appetite for risk, but also on your individual circumstances. Taking too little or too much investment risk might endanger your long-term finances. Getting the balance right is hard; but doing so can boost your confidence in retirement enormously.<\/p>\n
Balancing risk partly involves choosing the right types of investment for you. It also involves knowing whether and when to generate some or all of your income from an annuity. Doing so may drastically reduce risk. However the money you spend on an annuity will no longer be available to pass on to your heirs.<\/p>\n
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Okay, let\u2019s assume you\u2019ve now got budgeting and risk management under control. But if you make the wrong assumptions about your life expectancy, you risk running out of money if you live for a long time. Many people budget for a fixed lifespan; this is too arbitrary. It\u2019s important to factor in an uncertain life expectancy into your calculations. If you buy an annuity, your longevity risk is removed. But relying wholly on an annuity isn\u2019t right for everyone.<\/p>\n
Even for a single person, uncertain life expectancy is a major complication in retirement planning. For a couple, life expectancy is even more complex; the chances are increased that at least one member of a couple will live well beyond their life expectancy.<\/p>\n
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There are some things that you simply can\u2019t plan for in detail, but if they happen they\u2019d make a nasty dent in your finances. These might include things like long-term care, or unforeseen spending to help out a child, just as examples. For such things, you should set aside a separate budget from your day-to-day spending budget. Some people might feel more comfortable creating a separate ring-fenced contingency fund, invested separately from everything else.<\/p>\n
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The assumptions you made at the start of your planning may no longer hold later on. If you stick rigidly to your initial plan, you may run the risk of running out of money. Or maybe you won\u2019t take advantage of good fortune by spending a bit more.<\/p>\n
Every so often, it\u2019s important to recalibrate your plan. You may find that you need to cut back slightly to keep yourself on track. This might be if the market takes a dip. It could also be if you ran up unexpected spending, which depleted your contingency fund. Or if you\u2019re lucky, you may find that you can afford to spend a bit more on luxuries.<\/p>\n
If you started with a well thought out plan, then any adjustments you make should not be too uncomfortable or drastic.<\/p>\n