Whether you are planning for the future or are already retired, it may be useful to review your budget. Having a clear understanding of your finances and how much you are likely to spend in retirement could help you ensure that you sustainably draw from your savings.
Unfortunately, many people approaching retirement do not feel confident that they can do this. According to the Actuarial Post, 73% of British adults surveyed were concerned they wouldn’t have enough money for the whole of their retirement.
Additionally, 34% said they were not sure how much income they would need to fund their lifestyle in retirement.
Fortunately, when you have a clear retirement budget, you can see exactly what you are likely to spend. This means you may be more likely to draw a suitable level of income from your savings and live your dream lifestyle without running out of money.
However, creating this budget can be challenging as there are many different expenses and income sources to consider.
Read on to learn five important questions to ask when planning your retirement budget.
1. How will your regular spending habits change in retirement?
When you retire, your regular spending habits may change because your lifestyle is different. For example, you may no longer have to consider commuting costs. Yet, you might spend more money on heating and energy bills as you are in the house more often.
You might also spend more on entertainment, eating out, or hobbies now that you have more free time to enjoy yourself in retirement.
On the other hand, your outgoings could fall in certain areas if you pay off your mortgage or your children move out of the family home.
It is important to consider these potential changes to your regular spending habits so you can create a retirement budget that accurately reflects your lifestyle.
2. What large expenses are you likely to have?
As well as your regular spending, you may need to consider any large expenses you expect to pay in retirement.
Often, this includes luxury travel, purchasing a new home or car, or financially supporting family members. You may also need to pay for care in your home or a residential facility if you have serious health problems.
These significant expenses can eat into your retirement savings and put greater strain on your income in later life. That’s why it’s important to account for them and set aside funds when creating your retirement budget.
3. Will you lose any perks when you stop working?
You may have enjoyed certain perks when you were working and if you will lose these when you retire, you might need to factor extra costs into your budget.
For example, if you have a company car, you might need to consider the cost of buying and maintaining a replacement vehicle after you retire.
Your employer might also provide private medical insurance or life insurance. These valuable protections could help you and your family if you suddenly fall ill or die, so it could be beneficial to replace them when you retire.
Unfortunately, medical and life insurance can be more expensive if you take out a new policy when you are older and potentially more likely to face health issues. This makes it all the more important to account for these costs in your budget.
4. What tax will you pay on your retirement income?
Depending on where you live and how much you draw from your savings each year, you may pay some tax on your retirement income. If you do not take steps to mitigate the tax that you pay, it could eat into your retirement savings and potentially affect your lifestyle.
Luckily, there may be several ways to reduce the tax that you pay, provided you plan ahead. For example, if you live in the UK, you normally have a Personal Allowance for income before Income Tax is due. In 2023/24, this is £12,570.
By considering your total income and where you draw the funds from, you can ensure that you use all available tax allowances and potentially reduce the amount that you pay.
5. How much wealth will you leave to your loved ones?
When you are planning how to spend your retirement savings, you may want to consider what you will leave to your loved ones.
You may decide to gift wealth to your family while you are alive, and these payments need to be included in your budget when calculating your expenses.
Additionally, you may need to manage your spending so you can retain some of your wealth and pass it on when you die. It might be useful to decide how much you want to leave to your beneficiaries ahead of time so you can plan accordingly when creating a retirement budget.
Working with a financial planner can help you create a suitable retirement budget
Calculating an accurate budget for your retirement can be challenging and if you misjudge it, you could end up overspending. On the other hand, you might be too cautious with your spending and make unnecessary sacrifices to your lifestyle.
Meanwhile, working with a financial planner can help you create a suitable retirement budget.
Cashflow forecasting can be beneficial as you can model various scenarios and see how a large outlay, such as care costs or a child’s wedding, might affect your finances later in life. A financial planner can use the software to give you an indication of how much you are likely to spend to fund your desired lifestyle too.
We can also help you make sure that you are being as tax-efficient as possible with your wealth, so you can keep more of your retirement savings.
Finally, we can discuss options for passing on wealth to your loved ones after you are gone.
By calculating all of these expenses more accurately, we can help you create a retirement budget that works for you.
Get in touch
If you need some guidance when creating a retirement budget, we are here to help.
Email enquiries@alexanderpeter.com or give us a call on +44 1689 493455.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate estate planning, tax planning, will writing or cashflow planning.
