Does retirement make sense financially – and in other ways?

Retirement almost never makes financial sense. It is clearly better to keep working and setting aside money than to give up your regular income and draw on the investments and savings you have spent a lifetime building up. However, that’s not quite the point: there will come a time at which retirement becomes financially feasible and a moment at which it becomes a good idea. How can you tell the difference?

Regardless of what you have saved for retirement, your day-to-day finances must be in reasonably robust health, which primarily means minimal debt. While most mortgage lenders will allow the maturity of loans to stretch into retirement, it becomes increasingly difficult, and possibly more expensive, to roll over debt without a salary to support repayments. In addition to smaller debts such as unsecured loans or credit card bills, paying down any borrowings on your home will leave you with more disposable income when you do decide to retire.

It also helps to retire at a time when your major expenses are behind you. For many people this will be repayment of property loans, but it may also include children’s (and possibly grandchildren’s) school and university fees. It certainly helps if children are well established with independent lives, flourishing careers and perhaps owning some kind of property asset. While you may still want to help them out financially from time to time, they are less likely to require emergency funding from ‘the bank of mum and dad’.

Deciding what life you want

Do you have a clear idea of the type of life you want to lead in retirement? It is important to decide this before you leave salaried employment. It would be miserable to discover afterward that you might have enough to live on, but will need to live out your days without holidays, meals out or new cars.

It is good to understand the likely shape of your retirement, along with an approximate idea of how much it might cost.

It is useful to understand the likely shape of your retirement, along with an approximate idea of how much it might cost. That should include large expensive items such as travel or property refurbishment, although resources may be increased by downsizing from a large family house to a smaller apartment.

It is also a good idea to factor in some contingency capital. Around two-thirds of people will eventually need some form of long-term care, which is expensive. While the state may pick up some of the bill, how much is subject to the vagaries of government policy and provision varies considerably from country to country. Many retirees may prefer not to be at the mercy of the state when selecting care, in order to have as wide a choice as possible.

What assets and income will fund your retirement?

This is not the time for surprises, but to get to grips with the financial resources you have at your disposal. That means first examining your pension provision, including how many pension schemes you belong to from different providers. In the course of a working life, most people will have had multiple employers, often gone through periods of self-employment, and signed up for private pension plans. There may be value in consolidating them into one or two pension schemes in order to oversee them more effectively.

You may also have other assets, such as rental property or investment portfolios, that can contribute to your financial resources in later life. The aim should be to build a picture of the total value of your assets and how they can be used to generate an income. There are plenty of online calculators that can aid understanding of how much income you can expect to earn from a particular amount of money. This exercise should give an idea of how long your savings will last, and what level of spending they can support.

Based on actuarial statistics, if a couple retires at 65, there is a 50% probability that at least one will still be alive at 92.

Finally, this process should also incorporate an assessment of how long you are likely to live. This is inevitably a gloomy subject, and one many people would prefer not to think about. It’s also fraught with uncertainty, but do bear in mind that many people underestimate their longevity. Based on actuarial statistics, of a couple who retire at 65, there is a 50% probability that at least one will still be alive at 92 and a 25% likelihood that at least one will live to 97.

It is worth considering whether you can defer taking your pension for a year or two. In most but not all cases – Luxembourg’s general pension insurance scheme is an important exception – every year you delay accessing your entitlement will improve your future income by permitting a further increase in the volume of assets available for generating retirement income and reducing the likely number of years of retirement during which the pension scheme will be paying out.

Are you keen to retire?

Work provides more than just money, and while some people can’t wait to leave the drudgery of the workplace, their volatile boss and irritating colleagues, for others it will be a wrench. The right job can provide intellectual stimulation, companionship, variety and – not least – a structure for life without which some individuals may be lost.

Increasingly, people are working beyond the official retirement age, especially if their jobs are not physically demanding, or can be done completely or partly from home. In the UK, for example, the number of over-70s still in formal jobs or self-employed increased by 61% to 446,601 over the 10 years to 2022 during the 2010s to nearly half a million. Often this is not because they need the money, but because they aren’t ready for the golf course or the garden.

It’s important to remember that retirement doesn’t have to be absolute, and today’s retirement financial products are designed to be far more flexible than those of the past. It is possible to continue with consultancy or other freelance work, or to undertake one-off projects, well into retirement. You might even consider pursuing a ‘second act’ venture, setting up a business or becoming a volunteer for an organisation that means something to you.

Even if retirement will almost never make you financially better off, there is a right time to do it, and times when it’s much less advisable. If you have considered all the different aspects and are comfortable that you have a clear path ahead, the right time may be now.

It is important to have a clear idea of the type of life you want to lead in retirement before you leave salaried employment, rather than discover later that you’ll have to do without holidays, meals out or a new car.