Retirement was once regarded as a remarkably clear-cut process. Particularly back when the average employee worked for the same company for much or all of their career, it was treated as little more than a date in the diary.
The switch was essentially binary. One day you were working, the next you weren’t. You stopped on a Friday – perhaps with a brief presentation to mark your departure – and you became a pensioner the following Monday.
Times have changed. Such a seemingly effortless step out of one world and into another is no longer a realistic prospect for a growing number of individuals.
Some people now retreat gradually, reducing their workload over the course of several years. Some leave full-time employment and then find themselves consulting, sitting on boards or building the sort of business they once dreamed about. Some stop completely, realise they miss the structure of working life and resume on a part-time basis.
Each of these approaches requires a slightly different kind of plan. Crucially, each also requires a recognition that retirement, far from being just a date in the diary, is a transition.
What do you want your days to look like?
Before we talk about pensions or investments, we always ask clients where they see themselves in a few years’ time. What would an average day look like? How do they think they might spend their time?
These are far from soft, meaningless questions. The answers can go a long way towards understanding how each client should think about income as they navigate one of the most important inflection points on any lifelong financial journey.
For example, a person who intends to spend three months a year travelling is unlikely to have the same needs as a person who plans to spend more time with their grandchildren.
Similarly, a person who wants to retain some sort of professional role is unlikely to have the same needs as a person who hopes to do voluntary work.
Yet there’s perhaps one thing that all these individuals have in common: a desire to remain active in the years after full-time employment ends. This is why their financial plans should follow their life plans.
Three key phases
Although every retirement is different, we often see a broad pattern comprising three overlapping phases:
- The active years. Spending is often higher than people expect during this phase, with travel, projects and financial support for family members all likely to peak. With health, energy and enthusiasm levels all good, this is when many long-held plans are at last put into action.
- The settled years. Life tends to become more localised and routines more established during this phase. Spending often eases, although some costs – those associated with home maintenance, for instance – can rise.
- The later years. This is the phase during which the focus can shift towards care, support and making sure affairs are in order. The challenge of passing on wealth as efficiently as possible may become a key issue – as we discuss in a separate article, which you can read here.
A good retirement plan considers all three phases simultaneously, allowing you to build in the flexibility needed to move between stages at your own pace.
Questions worth asking early
The five or so years before you intend to change the way you work are usually the most valuable timeframe for planning. The decisions you make during this window are likely to have a lasting effect. Here are a few questions we would encourage anyone to give thought to:
- When could you afford to stop working entirely?
- When would you actually want to?
- What pensions and savings do you have?
- In what order would it make sense to draw on them?
- How much income do you need to feel secure?
- How much would you like for the things that make life enjoyable?
- What would happen to your plans if your own health or your partner’s changed unexpectedly?
- Do you want to help children or grandchildren during your lifetime rather than only through an inheritance?
Aim for flexibility
Modern pension rules give people far more choice than they once had over how and when they take income. This level of freedom is valuable, but it also places more responsibility on the individual.
Taking too much income too early can leave a shortfall later in life. Being overly cautious can mean missing out on the years when money would have made the biggest difference.
Retirement is a transition that’s less clear-cut than it used to be but which, with the right guidance, can be optimised like never before.
The Switchpoint team
A good plan balances these risks. It’s also revisited regularly – recognising that markets move, tax rules get shaken up and, most importantly, people change their minds about what they want.
Remember, too, that retirement affects more than one person. Partners may have different timelines and different ideas about how to spend the years ahead, while adult children sometimes have expectations that have never been discussed.
This is why we’re always happy for family members to join a meeting. We often find the most useful outcome is simply getting everyone on the same page in understanding a transition that’s less clear-cut than it used to be but which, with the right guidance, can be optimised like never before.
This article is for general information only and does not constitute financial advice. The value of investments can fall as well as rise, and you may get back less than you invested. Please speak with an adviser before making any financial decisions. A pension is a long-term investment. You can’t normally access your pension until age 55 (57 from April 2028). Tax treatment depends on your individual circumstances and may be subject to change in future.
Switchpoint Wealth Management Limited is authorised and regulated by the Financial Conduct Authority; Firm Reference Number 1059781
