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. However, that’s not quite the point: there will come a time at which retirement becomes financially feasible and a point at which it becomes a good idea. How can you tell the difference?
Your current financial situation
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 providers will allow loans’ maturity to stretch into retirement, it becomes increasingly difficult to roll over debt without a salary to support it, and it may become more expensive. In addition to smaller debts such as unsecured loans or credit card bills, paying down your mortgage will leave you with more disposable income when you do decide to retire.
Equally, it helps to retire at a time when your major expenses are behind you. For many this will be their mortgage loan, but it may also include school and university fees, and it certainly helps if children are well established with independent lives, flourishing careers and perhaps some kind of property asset. While you may still want to help them out from time to time, they are less likely to require emergency funding.
Do you have a clear idea of the type of life you want in retirement? It is important to establish this before you leave salaried employment. It would be miserable to discover that you might have enough to live on, but would 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 good 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 worth factoring in some contingency capital. Around two-thirds of people will need some form of long-term care, which is expensive. While the state will pick up some of the bill, it is subject to the caprices 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, but to have greater choice if it is possible.
This is not the time for surprises, but to get to grips with the financial resources you have at your disposal. That means looking first at your pension provision: how many pension schemes do you belong to from different providers? In the course of a working life, people may have multiple employers, periods of self-employment and private pensions. 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 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 create an income. There are plenty of online calculators that can help understand how much income you can expect to generate from a specific lump sum. This exercise should give an idea of how long your savings will last, and the 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 will also need to incorporate an assessment of how long you are likely to live. This is inevitably a gloomy subject, and many people would prefer not to think about it. It’s also one fraught with uncertainty, but many people underestimate their longevity. 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 and a 25% likelihood that at least one will be alive at 97.
It is worth considering whether you can defer taking your pension for a year or two. Every year you defer will improve your situation, by permitting a further increase in the volume of assets available for generating retirement income and reducing the number of years of retirement that pensions must support.
Your state of mind
Work provides more than just money, and while some people can’t wait to leave the drudgery of the workplace, their volatile boss and their irritating colleagues, for others it will be a wrench. The right job can provide intellectual fulfilment, companionship, variety and – not least – a structure for life without which individuals may seem lost.
More and more, people are working beyond the official retirement age. In the UK, for example, the number of over-70s still in work has doubled in a decade 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. It is possible to continue with consultancy or other freelance work, or 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 never really makes financial sense, there is a right time and a wrong time to do it. If you have considered all these aspects and are comfortable that you have a clear path ahead, the right time may be now.
Some people can’t wait to retire and leave behind the drudgery of work; others fear the loss of the structure and sense of purpose it gives them. Getting the timing right is important – retirees need to know they are financially equipped to meet their needs and desires over a period that may be longer than they imagine.