As Woody Allen said: “We are all interested in the future, for that is where you and I are going to spend the rest of our lives.” However, when considering the issue of retirement, this interest often gives way to worry or even anxiety. What can you do to make the most of your retirement, despite the significant decrease in income? We put together a few ideas below.
Before retirement – be prepared
When it comes to preparing your finances for retirement, think of the old adage: “a stitch in time saves nine”. This certainly holds true: if you rely solely on your state pension, you will have to live off almost a quarter less than your previous income (on average). You may even much get less, depending on your situation.
You therefore need to prepare for this drop in income long before you retire, and there are several ways to do this:
- Join one or more supplementary pension schemes, whether through your employer (second pillar) or in the form of a private pension (third pillar). These guarantee regular income and/or additional capital when you retire.
- Pay off the mortgage on your primary residence and carry out any renovations that need to be done. Having one less lease or loan to pay will make a big difference!
- Put aside some money for emergencies or to help pay for certain luxuries. You can set up a standing order to pay into your savings account every month.
- Purchase financial assets or property that can serve as a source of recurring income. Your bank adviser can help you build a portfolio that best suits your investor profile.
Lastly, don’t wait until you retire to find out the value of your pension. Find out how much you’ll get, compare this with your current standard of living and start to think about any necessary financial adjustments to be made. Plan ahead to ensure that your future needs and projects can be met by your financial situation.
During retirement – be flexible
Already retired? Congratulations! This doesn’t mean you have to miss out. Quite the opposite: while you should adjust your spending to your new situation, retirement also gives you the opportunity to enjoy a new-found freedom. You will have more time to compare offers and identify the best deals, while your transport costs will go down along with your tax burden. You will spend less money eating out with friends or colleagues, and you can go on holiday when the time and budget suit you.
You should also think about how to use your savings or the capital from your personal pension plan. Generally, your financial needs will stay more or less the same between the ages of 60 and 70 and should gradually decrease from 70 onwards (unless you require extensive assistance). To deal with your new situation, you may be able to convert your personal pension into a capital payment and an annuity. The capital allows you to maintain your current standard of living at the beginning of your retirement, and the annuity makes sure you have enough until the end.
If you receive a lump sum, consider dividing it into several tranches: one to be converted into an annuity, one for emergencies and one to pass on to your loved ones.
If you hold financial assets in addition to your recurring income, you should consider dividing them into several tranches: one part to be converted into an annuity, one for emergencies and one to pass on to your loved ones.
Another way to boost your purchasing power is to spend your retirement in a country with a lower cost of living. The potential benefits are huge – lower cost of living, more sunshine, better quality of life and better living conditions. However, don’t underestimate the effects of culture shock or separation from your loved ones in Luxembourg.
Whatever the case, be sure to think carefully before making a decision – after all, you can’t put a price on a happy retirement.