Are you a baby boomer nearing retirement and dread your investment horizon? You are not alone. Sadly for many, retirement means increased financial stress and worry as recent surveys show. We are going to look at the way you will really set financial goals for your retirement savings.
Understanding Retirement Financial Anxiety
According to research by the Pensions and Lifetime Savings Association (PLSA), the top challenges most retirees in the UK encounter before getting to the goal setting stages are: insufficient finances, unsustainable current lifestyle and fear of running out of money. These concerns are real. However proper planning and solid goals to aim for, will lessen the fears.
The Importance of Establishing Financial Goals in Retirement
Financial planning in retirement is more than just a good idea it is essential to ensure your peace of mind and financial security. Here is why:
1. Financial stability: Clearly defined objectives will assist you in keeping your income stream consistent so that it remains in balance to meet any unexpected expense during retirement.
2. Clarity and Direction: It provides a clear path to follow, aiding in setting spending priorities and making it easier to save and invest in the long term.
3. Promoting Accountability: Setting clear goals, ensures that you know what it takes to keep on track and committed towards their achievements
4. Boosting Motivation: It can be incredibly motivating to see your progress toward real goals, which helps you stay the course of any financial plan.
Let us now break down how to set the goals into steps to help you set Specific, Measurable, Achievable, Realistic and Timebound (SMART) financial goals for your retirement.
STEP 1: Understand Your Current Financial Situation
You must first estimate your current financial position to help you understand your worth. For example, itemize and calculate all your assets such as property, investments, and savings, and liabilities such as loans, debts, and mortgages. Subtract assets from liabilities to arrive at your net worth. If your total assets are at £700k and total liabilities £300k, net worth= £700k minus £300k = £400k
Take a close look at your monthly income and outgoings. This will help you understand areas where you can cut costs, make potential savings to help determine how much income you would need in retirement. The MoneyHelper budget planner is an helpful tool to estimate your income and expenses.
STEP 2: Establish Your Retirement Objectives
You need to define what you want your retirement to look like and how much money you need to have in savings that will help you achieve your desired lifestyle.
You should consider the following factors:
1. Retirement Age: While some people aim to retire early, others prefer to work until the official retirement age. It is not one size fits all. Determining the age you would like to retire helps with planning, the earlier you start planning the better. Planning at age 40 gives you 25 years to prepare if you want to retire at 65 and only have 10 years if you plan to retire at 55.
2. Lifestyle choices: What does your ideal retirement look like? What kind of interests do you plan to pursue? Your desire might be to travel across Africa, Ski holidays in winter or take piano lessons. You need to calculate the cost of your desired lifestyle and that will assist you in establishing a realistic savings target. Read the PLSA Retirement Living Standards for further guide.
STEP 3: Establish Your Short v Long Term Goals
Your short-term goal can be to create savings of at least three to six months’ worth to cover unanticipated expenses. For medium term goals, you can aim to pay off high interest debts such as mortgages, credit cards, car loans to start your retirement debt free. Long-term goals can be to ensure that you have sufficient savings to cover your healthcare costs in old age.
STEP 4: Create a Retirement Budget
Develop a monthly or annual spending plan (budget) based on your income and expenses. As a general guideline, you should estimate that you will require 70 –80% of your pre-retirement income per year and budget for at least 20 to 30 years after retirement considering more people are living longer due to advances in health care.
Retirement Expenses are:
- Rent/Mortgage (if not yet paid off)
- Daily living Expenses: Housing, food, utilities, transportation
- Healthcare cost: Insurance, medication, Opticians, Dentist visits
- Leisure activities: Travel, hobbies, dining out and sports
- Inflation: cost of living will increase over time
Estimate your Retirement Income:
- Identify all potential income sources, including:
- Pensions: Add any pension plan or annuities
- Social Security benefits
- Investments: Stocks, Shares and other investments
- Savings
- Other: rental income, part-time work or other sources.
STEP 5: Develop a Savings Plan and Diversify Where You Invest
To achieve your hopes for a secure and enjoyable retirement takes commitment, discipline and the right savings plan. Automate your savings by making direct debits out of the account where you get paid to a retirement savings fund on your pay day.
Make sure your risks are diversified among asset classes (stocks, shares, real estate) according to what you decide is the level of risk that suits you and advances your investment goals.
STEP 6: Review and Flex Your Goals Regularly
Flexibility is key in adapting to changes without losing sight of your goals. Ensure your plan is a living document and revisit/alter as you experience changes in circumstances: such as promotion, loss of job, poor health or bereavement together with the advent of grandchildren.
Conclusion
Having financial goals is the basis for building a retirement lifestyle that satisfies your needs, keeps you safe and fulfilled. Whatever your age, it is not too early or late to start planning and you should be able to do so without the added stress of financial anxiety.
Take the first step towards your retirement today! Subscribe to our newsletter and download our free retirement planning checklist. Additionally, see our article on Financial Wellness in Retirement: Building Security and Peace of Mind for more advice on managing your finances. We would love to hear from you and learn about your experiences, views and advice.
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