SIX FINANCIAL OPTIONS FOR WHEN YOU RETIRE – AND WHY FIVE ARE DOOMED TO FAILURE
By Mary Waring, author of ‘The Wealthy Woman’
We all know that we should save for the future, and yet it’s so easy to put it off for another day.
Initially the reason is that retirement seems such a long way off. However, as time marches on, the reason we don’t address it is often because we’re worried we don’t have enough money, and don’t really want to face up to the reality. So sometimes we prefer not to know.
So what are the options for when we retire?
1. Rely on the state
I’ve met many women who tell me they’re going to rely on the state when they retire. However, this soon changes when they hear that at the minute the state pension is £5,727.80 per year – a measly £477 per month. After paying all utilities (gas, electric, water, council tax etc) and food, that’s going to leave very little left.
Although there are plans for the state pension to be increased, the new pension will be £144 per week, which is the equivalent of £624 per month.
Yes, that’s a big increase on the current level but certainly not enough to provide a decent lifestyle.
It’s enough to keep you off the breadline, which is all it was ever intended to do. But who wants to live just above the breadline after a lifetime of hard work?
Many women end up relying on the state – not because it was their plan, but because they didn’t plan anything else. Do not end up in this category. Your state pension will cover basics and keep you off the poverty line, but not a lot else.
2. Rely on your husband or partner
This is a common plan. It’s not unusual for a couple that there is one pot of money, which is designed to be for both parties when you retire.
But if this is your plan you need to check that the pension pot does infact have enough money in it for both of you. I’ve lost count of the number of females who tell me they’re going to rely on their partner’s pension. Yet when I look in detail at the pension there’s not enough to keep one person in comfort, let alone two.
So although this is a reasonable plan, do make sure there is enough money in the pot for both of you.
3. Rely on an inheritance
Depending on your age, it wouldn’t be unusual for your parents to have bought a house for a tiny sum that is now worth a small fortune, due to the large increases in house values over the years.
Whilst I’m sure you’re not planning the demise of either parent, it may well have occurred to you that there’s a future inheritance available to fund your retirement.
However a few things to bear in mind:
You have no idea at what age you will receive your inheritance. Your parents could live to their mid 90s and beyond. Depending on how old they were when you were born, you could be well past your planned retirement age at this stage.
Consider, also, that inheritance tax kicks in at 40% on the value of any estate over £325,000, and this will reduce your inheritance significantly.
Another issue to consider is that, in the future, your parents may need long term care. We are all living much longer than earlier generations, but we are not necessarily as healthy as we’d like to be in later years. If your parents need long term care, the value of their estate may be used to pay for it.
Relying on an inheritance is a very poor plan. Not only do you have no control over when you can access the funds, you also have no idea what funds will be available. Long term care costs and inheritance tax could significantly erode the value of your inheritance.
When your inheritance eventually does arrive, it may be nowhere near the amount you had anticipated when you initially considered this to be your ideal financial plan.
4. Rely on your children
If you haven’t saved in the past because you’ve spent most of your spare cash on your children, you may be hoping that they will be able to help you out in the future.
Whilst many children would be very willing to help their parents, you do have to consider the state of their finances. Depending on their age, they may be saddled with an enormous mortgage and may, themselves, be struggling to find sufficient funds to cover their outgoings. There won’t necessarily be any spare cash to help you.
This is a very dangerous plan. It’s much better to have your own plan and then, if your children can help out, that’s an added bonus.
5. Hope and pray
As a financial planner, I’m never going to advocate that this is a sensible plan. Hope is not a strategy.
If you have this as your plan and realise when you get to retirement age that the plan hasn’t worked, it’s then too late to do anything about it.
It’s much better to have a separate plan and then, if the universe somehow gives you all you need when you retire, you’re going to be feeling very comfortable indeed. You’ll have more than enough and will really be able to enjoy your retirement years in abundance.
Don’t you think this is a much better plan than the alternative?
6. Do it yourself
There are several options available to convince yourself you will have a comfortable lifestyle when you retire. These options range from sticking your head in the sand and ignoring the whole issue, to relying on others to sort the problem for you.
As shown above, each of these is riddled with issues you may not have thought of, and not addressed.
The most sensible option is to take responsibility yourself and take whatever action is necessary to save sufficient funds.
When you retire you will have more free time in your life than you’ve ever had before. Therefore, you may want to take up some hobbies, or spend time doing the hobbies you didn’t have enough time to enjoy whilst you were working.
Well, you have the time, but do you have the money? You may want to have more holidays and weekends away, because at last you have the time to enjoy your breaks.
If you retire in your mid 60s you will probably live for another 20-30 years. The typical woman in her mid 60s these days is certainly not old. She probably doesn’t even consider herself to be middle aged, yet.
She’s looking forward to having time away from work to enjoy herself. However, having lots of free time doesn’t sound so attractive if you can’t afford to go out and do the things you want.
Start planning as early as possible so you can enjoy your retirement years doing all the things you love to do.
The first thing to consider is a cash ISA. If you have never saved before this will help you set up a savings habit. However the interest rate you get on cash savings is very small so this option is purely to help you get into the habit of saving rather than to be used a long term plan.
Once you are comfortably with how much you can save each month start looking at a stocks and shares ISA. With this scenario your money is invested on the stock market and has the potential for greater growth than a cash account.
When you have used your annual ISA allowance (currently £11,520 each year) consider investing in a pension plan. Money invested in a pension plan is tied up long term and cannot be accessed until age 55 at the earliest, and there are limits as to how much you can access at any time. However, there are significant tax benefits to investing in a pension plan. The limits as to how and when you can draw the funds are to ensure that money is actually available for your retirement rather than for use as general savings.
By putting a financial plan in place, as soon as you can – even if it’s later than is ideal – you will help secure your retirement years and ensure you’ll be able to enjoy them, rather than scrimping at every turn or asking friends and family for hand-outs.
Mary Waring is an independent financial adviser and the founder of Wealth For Women, specialising in financial advice to women going through divorce. She is both a Chartered Financial Planner and a Chartered Accountant, being one of only a handful of advisers in the whole for the UK with this high level of qualification. Mary is passionate about changing the way women think about finance. Too many women stick their head in the sand and ignore it, or rely on a man to sort it for them. Mary is also author of ‘The Wealthy Woman – a man is not a financial plan’. See: www.Mary-Waring.co.uk