Thinking about when to retire? Here’s 3 things you need to know

Don’t put off answering the tough questions. Your comfortable retirement could depend on it.

Paul Summers

Paul has been teaching psychology in higher education since 2007 and also holds the CFA Society's Investment Management Certificate (IMC). It won't come as a surprise to learn that he's particularly interested in anything related to behavioural finance. A Terry Smith-influenced quality investor, Paul is a fan of companies boasting seriously high returns on capital. He always reinvests his dividends.

Published 27 October, 2019 12:44 pm GMT

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Approaching retirement should be a time of great excitement. After all, you now get to do those things you’ve had to put off for so long because you simply haven’t had the time or freedom.

Before getting ready to swap the office for somewhere more appealing, however, it’s important to take the time to ask three questions. The first and last of these you’ll be expecting. The other one you might be tempted to dodge.

1. How much money will you need?

Thinking about how much money you’ll require to enjoy a comfortable retirement can be done in a fairly intuitive way by simply taking your current outgoings and estimating the extent to which these will be reduced once you quit the rat race.

I say, “reduce” because it really depends on what sort of retirement you’re looking for. This will naturally vary from person to person, so it shouldn’t be assumed that costs will automatically go down. Travelling the world doesn’t come cheap.

Unfortunately, this isn’t enough. Obtaining a better estimate involves asking some additional, more unnerving questions. There’s no way of sugar-coating this so let’s just crack on.

2. How long do you expect to live?

Clearly, any response to this question is likely to be fairly imprecise. To get the ball rolling, however, consider that the average life expectancy in the UK is currently just under 81 years old. Then look at your family history and general health. Bear in mind that things like your gender, ethnicity, education, and marital status might also have an impact.

As well as being no more than an ‘informed guess’, it’s also vital to stress that this estimate is always in flux. A decision to replace unhealthy habits could add years to your life, thus potentially invalidating previous predictions. You may end up living a lot longer than you think (albeit possibly requiring expensive medical care in later years).

So, let’s no get too bogged down. Having come up with at least some kind of answer, it should be possible to calculate just how much a decent retirement is going to cost.

3. Can you really afford it?

The traditional source of income during retirement is the State Pension. Right now, this comes in at £168.60 for men born on or after 6 April 1951 and women born on or after the same date in 1953. That’s unlikely to be sufficient on its own to fund the lifestyle many wish for.

Hopefully, you’ll have a workplace pension to help make up some or all of the shortfall. If this still isn’t sufficient (and you don’t have any other sources of income), you’ll need to put back your ideal retirement date or increase your savings in what time remains.

Both involve sacrifice of some kind so select which is the least painful. If neither appeals, you may need to reduce your desired income, post-retirement. Speaking to a financial advisor before making a decision is recommended.

Personally, I think anyone contemplating the later stages of their life should consider the stock market as a way of funding it. Buying a diversified bunch of slow-and-steady blue-chip stocks and holding them within an ISA or a SIPP, for example, can not only help grow savings both pre- and post-retirement but also provide dividends to help with expenses once you’ve left work.