What are the key steps for retirement? With increasing numbers of people working past traditional retirement ages, stopping work can seem a long way off, especially for younger people. But it’s the dream of an early retirement that keeps many people going through the daily work grind.
The opportunities that retirement brings are limitless, with travelling or spending long periods abroad, taking up a new hobby or sport or undertaking voluntary or charity work being high on many people’s wish lists. Whatever you want to do when you retire, the better prepared you are, the more rewarding it will be.
It’s important to assess the key aspects that will influence your retirement, as the decisions you make can have a real impact on your savings.
Reasons to start saving for retirement early
You’ll prepare in a more relaxed way
Saving for 30 years instead of 10 means you can put away less money each month and reach the same target. It’ll also mean you have cash left over to spend on yourself in the meantime.
Earn more thanks to compound interest
If you start saving today, you’ll earn more because interest payments build up – every interest payment you receive starts earning corresponding interest itself right away.
You will enjoy greater peace of mind
Putting in place a financial plan for your retirement means you can start looking forward to a more comfortable retirement. You’ll feel more confident about life after work knowing things are taken care of from a financial perspective.
You could retire earlier
If you manage your wealth and retirement planning wisely, you might find you’re ready to retire younger than you’d imagined. Give yourself more time for the things you’ve always dreamed of doing.
Plan when you have more disposable income
It’s normally the case that you have more disposable income from your twenties into your early forties. Later in life, you may find that you have more responsibilities – children’s education and mortgage payments, for example – and find it harder to put money into your retirement fund every month. Start early while you have extra funds.
Key steps to retirement – what you need to think about:
Drawing savings too early is likely to result in lower returns and/or lower lifetime income. Drawing savings later may not result in higher returns – this depends on how you invest and use your savings. To retire earlier requires planning, discipline and paying close attention to your savings and investments. But the sacrifices and extra effort are worth it to enable you to have more opportunities to spend time with the people you care about. But early retirement also can bring with it the challenges of meeting your life goals, such as funding a child’s education and their wedding, along with bearing household expenses long after you’ve retired because of increasing life expectancy.
There are choices to make between generating income now versus providing for your future. You may also continue earning some income during retirement through paid work, business ventures or even lucrative hobbies. Your income needs are likely to vary over time, and some expenses are fixed while others are variable. Most critically, long-term care can prove expensive. Your income preferences are also key – having a known stable income source may be preferable to having a higher but less stable income.
This is the trade-off between relative safety (which you may choose out of concern) and taking risk (which you may choose with an aim of achieving growth). Your attitude to risk may also change as you accumulate wealth (because you have more to lose) and as you get older (because you have less time to recover if your investments fall in value). But risk is never completely eroded – even with cash or an annuity.
Also ask yourself the following to help build your retirement plan:
- What is my life expectancy, and how much money will I need to achieve my retirement plans?
- How could my income and capital needs change in the future?
- Do I have an effective plan to leave a financial legacy?
- How much money would my spouse/partner need if I die before them?
- How might I protect against the effect of inflation?