How to manage the cost of living in retirement
One of the challenges in preparing for retirement is lacking a realistic idea of how much money is needed. You may have a specific income in mind, such as £18,000 from an annuity, but knowing how to work out how big your fund needs to be to achieve that can be difficult.
Your first step should be having a pension review. We provide free, no-obligation pension reviews, to give you a firm understanding of your pension including costs, growth and if it could perform better with some adjustments.
This will put you in a better position for planning. For instance, you may decide that by releasing a portion of your 25% tax-free cash you can clear your mortgage or other debts, reducing your monthly expenses and relieving the strain on your pension when you need to live on it.
You should also know what sources of income you will have - will it only be your pension, or do you have other savings and investments? Will you be eligible for any benefits? The Citizens Advice Bureau explains that some pensioners are eligible for Pension Credit, which will entitle you to receive Cold Weather Payments, in addition to the Winter Fuel Payment that most pensioners receive. You could also have a reduction in your Council Tax if you are responsible for paying it, and some renters can also claim Housing Benefit.
Once you reach the age of 75 you can get a free television licence, and as a retiree you may be eligible for free prescriptions and other health costs. The combined cost of all of these things can be significant, so reductions and waived costs can be a welcome boost to your wallet and allow your later life income to cover more than it otherwise would have done.
Working out how much money you will realistically need in retirement means you need to consider your financial situation as a whole. You may be spending £900 a month on a mortgage now, but if you have managed to pay it off by the time you retire you can lower your income expectations accordingly. Similarly, will you retire with credit card debt? Will you be buying a new car in retirement, or planning regular holidays? These are questions that shouldn't be too difficult to answer, but can shed some clarity on your needs. After all, if you will be mortgage free and receive a reduction in your Council Tax bill in addition to the Winter Fuel Payment, your biggest expenses could be removed or hugely reduced.
This shouldn't inspire complacency though. Prudential's Class of 2014 report states that 7% of men and 20% of women retiring this year will be wholly dependent on the state pension, which is alarming. The state pension is currently £5,881.20 for a single person - significantly lower than the £8,600 considered the minimum for an acceptable standard of living.
On the state pension alone, even running a car could be tricky. According to the AA, fuel has gone up 17% and insurance premiums have increased 24% in the past two years, and then there are costs like tax, MOT, maintenance and repairs. Residents of the South East need almost £12,000 a year to cover total living expenses - more than double the current state pension - and the average spend on food alone is £1,563 for over-65s. According to a study by National Employment Savings Trust (NEST), a comfortable retirement requires £15,000 annual income.
The best way to prepare for retirement is to start early, and our post "How retirement planning can change your life" can help put you on course to do this.
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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new
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