18th July 2018

A lack of preparation could mean that today’s over-50s are heading for disaster when they reach retirement. In fact, research from the London Institute of Banking & Finance shows that half of people approaching retirement do not feel well prepared for it. To illustrate:

  • 35% worry about how they will manage financially in retirement
  • 38% say they will have to work longer than they had planned
  • 47% need to save more for retirement

There are several factors causing a misalignment in retirement preparations:

1. Attitude to risk

The figures reveal that an overly-cautious attitude toward investments may have meant that those nearing retirement have missed out on potential returns. Instead, savers have taken the ‘safe option’ of savings accounts, which have seen record-low interest rates and have often failed to keep up with inflation. That will have lead to their savings devaluing over time, rather than generating a comfortable retirement fund.

This route has resulted in many of those who are due to retire soon being underprepared for the financial challenges that later life may bring and may have left them with unrealistic views of how far their money will carry them when they stop working.

2. Life expectancy

The length of your retirement will greatly impact how much you will need to retire. If you are among the 80% of over-50s who underestimate their life expectancy, you could find that your money needs to last a lot longer than previously assumed (Source: Retirement Advantage). Of course, by the time that becomes clear, it could be too late, and your retirement fund may well have already been spent.

If you have at least 10 qualifying years on your National Insurance record, you will be eligible for some State Pension. However, consider the lifestyle you have planned for your retirement; that is unlikely to be possible if you suddenly have the State Pension alone to support you.

According to the International Longevity Centre, although life expectancy is gradually rising, the proportion of that life which will be spent in ill or declining health is, too. To illustrate, in 2000-2002, the average woman was expected to spend the last 8.2 years of life in bad health. By 2014, this had risen to 9.6 years.

Both living longer lives and having more years which may require care or assistance, will affect the way your retirement income will be used, and thus, how much you will need to start with.

3. Failing to put enough away

The amount you will have available in your pensions when you stop working will depend on the contributions you are making now. Most people who are making the minimum contributions into a Workplace Pension, will discover too late, that they will not add up to an adequate retirement fund in the long run.

In order to fix this, before it is too late, you may choose to increase your monthly pension contributions, or make additional lump sum deposits when you are able to.

4. Not understanding the State Pension

To form a well-rounded financial plan for your retirement, you will need to incorporate every source of money available. While it may not be a large portion of your retirement income, understanding the State Pension will help you to factor the extra income into your plans.

To find out how the State Pension will affect your retirement plans, and to make sure that you get what you are eligible for, get in touch with us.

5. A lack of planning

There’s no plan worse than leaving your retirement plans to chance. In order to ensure that you are ready, both financially and emotionally, to leave working life behind and enjoy the remainder of your life, you will need to have a strategy in place.

Planning ahead will also help you to improve the confidence you have in your finances and ensure that you feel prepared to retire on your own terms.

The effects of being unprepared

CEO of the London Institute of Banking & Finance, Alex Fraser, warns: “This generation is often considered lucky – many were able to buy affordable homes and many still have final salary pension schemes, even if they’re quite modest. But perhaps they’ve been lulled by that into a false sense of security. A failure to take a more holistic view of their assets and seek advice means that many risk plunging head first into a gap between reality and their expectations.”

Being financially unprepared to stop working will leave you on uncertain ground and could lead to a variety of difficulties, including:

  • Spending too much, too soon and running out of money: While running out of money completely in retirement is relatively rare, it is entirely possible to spend too much and face the need to spread your remaining fund further than expected, meaning that you will need to live on less income than you had originally planned.
  • Being unable to afford the care you want and need in later life: In retirement, you will need to support more than just your desired lifestyle. If you require care or assistance in later life, you may find that those costs amount to more than expected. Research has shown that the weekly cost of care has risen to more than £1,000 per week, on average (Source: UK Care Guide). That is only likely to increase between the date you leave work and the age at which you eventually need to pay for such services. Therefore, you need to take care of your money in the short term, to ensure that you have enough for circumstances which may present in the future.
  • Affecting your ability to leave a legacy for those you love: If you are planning to leave money or property behind for your loved ones when you die, those intentions could be jeopardised if you need to rely on that money or sell the property to ensure that your own financial needs are taken care of.
  • Having to rely on your family for financial support: If you begin your retirement in a comfortable financial position, it is likely that the last thing you will want to do is admit that you have overspent and ask your children or grandchildren to support you financially. To avoid this, you will need to make sure that you are fully prepared for all eventualities retirement may bring, and that you have a solid financial plan in place.

The importance of financial advice and planning:

The most effective way to ensure that your finances are positioned to support you throughout retirement, regardless of the twists and turns it brings, is to develop a financial plan. This will involve engaging with a financial planner or adviser, which is where we can help.

Why is a financial plan important?

According to the research from the London Institute of Banking & Finance:

  • 44% of people do not think they have the necessary knowledge to make decisions without consulting a financial adviser
  • 41% of over-50s say don’t feel confident making decisions before talking through their options with a financial adviser
  • Almost half (42%) of those who have sought financial advice now have a financial plan in place as a result

Engaging with us puts you in a more viable position to make financial decisions. We can help you to see things from a different perspective and ensure that you are aware of the possible consequences of each decision you make. We can also introduce you to options you may not have heard of, or considered previously, which could help you to have an even more fruitful retirement fund.

For more information, or to get started, feel free to contact Ben on 0113 262 1242.