How to Decide When to Retire

Deciding when to retire can be confusing. We outline the key considerations that will help you to be financially secure in your golden years.

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How to Decide When to Retire

If you retired today, would you have enough to support yourself and your family financially with your current pension savings?

How to decide when to retire will largely depend on if you have enough money to live comfortably. If you retired today, would you have enough to support yourself and your family financially with your current pension savings? This can help give you an idea of if and when you'll be able to retire.

If you already have an idea of when you want to retire, the run-up to it may feel overwhelming. However, this is an important time for you and your savings. You’ll need to look at different sources to estimate how much income you’ll have, including the State Pension, personal or workplace pension schemes, state benefits you may qualify for on retirement, and your other savings or investments. Following the pensions reforms, there are now more options available than ever to help you decide when to retire.


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Find out what income will allow a basic retirement lifestyle

If you've decided it's soon time to retire, you need to think about what you’ll do with the money you’ve worked hard to save all these years. The average UK pension pot after a lifetime of saving stands at £61,897. With current annuity rates, you'd get an income of only around £3,000 extra per year from age 67. When added to the maximum State Pension, you'd get just over £12,000 a year – just enough for a basic retirement lifestyle. You'll need to weigh up whether you'll have enough to afford the lifestyle you want.

When it’s time to take a retirement income, some people choose to do so through pension drawdown. Pension drawdown provides a flexible income, set at whatever level you choose, which can be increased or decreased over time to match your needs. This can be useful for retirees who need flexibility as their income needs change.

Ask yourself whether you want stability or flexibility

For many, the pension drawdown is a more fitting solution to their retirement needs than purchasing an annuity. Pension drawdown lets you withdraw money from your pension at a certain rate. The drawback to drawdown is that it can only continue for as long as you have savings in the pot: once they're gone, you won't get anything. It's important to get professional financial advice to ensure that you withdraw your money at a rate that will last your expected lifetime.

Purchasing an annuity when you retire, on the other hand, typically allows you to fix your monthly income for life. This means you can rely on your pension to provide you with an income for the rest of your life, but it won't offer you any flexibility should your income needs change. When it comes to how and when to retire, it's stability versus flexibility: which do you prefer?>

Work out how long your savings will have to last

Your retirement could last for over 30 years, depending on when you retire and how long you live. This is why many use pension drawdown for their retirement income, as it gives you flexibility as your income needs change. Your savings also remain invested even after you retire, meaning they can continue growing. However, it’s impossible to predict exactly how much they'll grow each year, and some years they may fall in value. If your withdrawal rate matched your growth rate, your savings could last indefinitely. Since growth is so hard to predict, this is impossible to do.

It's also impossible to know when you'll die, but it's definitely something you'll need to think about when considering when to retire. You'll have to strike a balance between withdrawing enough money to enjoy yourself while you're still alive, and not enjoying yourself so much that you have nothing left towards the end of your life.

Know how much you can safely withdraw from your pension

When you'll be able to retire depends on if you can afford to live on the typical pension payout. A 4% withdrawal rate is the standard guide for how much you can take annually from your retirement savings, based on the history of the financial markets and how much investments have tended to grow over periods of around 35 years. If you have £500,000 in savings when you retire, 4% would initially equate to £20,000 a year.

However, there are some things that mean this figure can’t be used totally reliably, which is something to think about when deciding when to retire:

  • Past performance of the stock markets cannot reliably predict future growth
  • The performance of investments in your portfolio may be better or worse than average
  • It’s impossible to know how long your retirement will last
  • Your financial needs are likely to change, typically peaking in early retirement and then in later life

Stay up to date with the changing pensions landscape

Depending on the year, then, a 4% rate of withdrawal could be either overly cautious, resulting in the accumulation of wealth that could create an Inheritance Tax liability, or overly reckless, resulting in complete depletion of your savings when you still have years left to live. This is why, when you retire, it's important to regularly assess changing pension landscapes, to make sure you're spending in line with your lifestyle and the market.

In this world of ours, very little stands still. It is vital to understand the rules and seek professional financial advice to help you decide how and when to retire.

Don’t suffer a ‘terrible shock’

Research shows there's a significant difference in how confident people feel about when to retire based on whether or not they've spoken to a financial adviser. Out of UK adults, 65% who have obtained financial advice say they feel confident they will have saved enough to be able to retire.

A positive retirement experience begins with a plan designed to help you live life on your terms. Your adviser will ask about your finances, personal circumstances, and retirement goals, then create a plan that will help you decide how and when to retire. Your adviser will answer these key questions:

  • How much you need to save for retirement
  • How to save tax efficiently for retirement
  • How pensions work
  • Types of pension you could choose
  • The right amount to contribute to it
  • How to boost your pension pot
  • How your pension should be invested
  • How to withdraw money from your pension

Malcolm had always dreamed of owning a yacht when he retired.

Wouldn’t you rather have a plan to make your dreams a reality?

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