Why Plan for Retirement? links
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Finance
Retirement is a time of opportunity and choice. The more money we have available to us, the more choices we have. Money can't buy happiness but it can buy choice. So we need to make the most of our money so that we have more surplus income to spend on those things we want to do.
Our starting point for finance in retirement is the amount of income we have left over after we have spent all the money that we have to spend - our mandatory expenditure. Mandatory expenditure is what we spend on things such as food, heating and lighting, council tax and so on. Everything we have left after that is our discretionary income, to spend or save as we wish. Only when we know how much discretionary income we have, can we make informed choices on what we spend our money on.
In order to do this we need a budget and constructing a budget is something we should all do prior to retirement. So we need to list everything that comes in and everything that goes out by way of expenditure or regular savings. We should do this both for our situation before retirement and what we believe it will be in retirement. We won't be able to do the latter completely accurately but we will be able to get a feel for it.
To help this process, we can get a State Pension forecast from the DWP. Their website is www.dwp.gov.uk. We will also receive an annual pension forecast from any company or personal pensions that we have and don't forget about any interest from savings that we might be able to use.
Once we have our budget and know how much we're likely to have by way of discretionary expenditure in retirement, then we can start to plan and make our choices. If we are going to receive a lump sum from any pensions that we have, we also need to plan how to use it. Do we want to spend some or all of it to reduce debt - paying off the mortgage or other regular outgoings? Maybe we might buy some big-ticket items that we believe we will need in the next few years so that we don't have to buy them out of our retirement income.
When we do retire it is unwise to make any final decisions as soon as we get our hands on lump sums and pensions, even though we have done some initial planning. It's more sensible to see how it goes for, say, six months, keep a close eye on our budget - income and expenditure - and once we're confident that we know how much discretionary expenditure we will have in retirement then we can make our final plans and choices.
So if we are going to make the right choices in retirement and live within our means at the same time, it is important that we plan our finances by creating a budget, seeing how much discretionary income we will have and then acting on that information. |