Table of Contents
Last week, with my son now in his early 40s, conversation turned to me asking him what financial planning for retirement he had done.
History repeated itself LOL.
It was much the same as when our accountant sat in our office with his Dad and I. We had just told him the good news that we were expecting our first child. To my surprise, our accountant responding by asking, in the light of the much longed for ‘expense' (of a baby), how we planned to fund our retirement!
And as we had no plans, NOW was the time to start.
Well, we thanked him politely for his advice, and totally ignored it.
My Own Lack of Financial Planning for Retirement
Gung-ho, and having just started up our own software business, in the early 1980s, we were confident that the business would grow fast and we had a wealthy retirement to look forward to. Every penny we made went back into developing the business, and our only luxury was paying for private education for our two sons (which we never regretted).
So it seemed madness for our accountant to suggest that we should be putting aside money for a retirement that would be years and years in the future, when we couldn't even spare money for a holiday the following year.
Although that business has given me an income that continues long past the conventional retirement age, I have been lucky, because technology moved at such a rate that our small software house couldn't keep up with the pace of the larger guys and instead of “dominating the world of software” we ended up with just a welcome, but steady, modest income.
Had we not been ‘lucky', my retirement income – unplanned as it had been – would have been much lower.
Of course, 40 year-old software isn't the most reliable of sources of retirement income. Which is why I am developing additional sources of income mentioned elsewhere in this site.
But back to the main thrust of the story….
What of my Son's Financial Planning for Retirement?
Just the same! Self-employed, working hard and anticipating a wealthy retirement, like his Mum and Dad did.
With hind-sight, I realise that the enthusiasm of youth tends to ignore two main things:
- The outside world has a nasty habit of NOT conforming to YOUR plans.
- By the time you reach your 60s you might have less enthusiasm for working on your business hour after hour; spending a little time ‘chilling' might seem more appealing than it does in your 20s.
So I have encouraged him to take a serious look at his budget and figure out exactly where the money is going, because that's the first step to making sure he can put aside some savings for retirement.
When you jot your out-goings down on a slip of paper you'll probably remember essential costs (food, housing, commuting) – but it's easy to forget bills that haven't popped up that month. For examply, “rainy day costs” can include something like an unexpected car repair bill, or a dead washing machine.
I found him >> this budget calculator << to help jog his memory about the costs of daily living, while keeping an eye on allocating some spare money for savings.
Happily my own parents drummed into me, and we passed on to our sons, the phrase “Never take a loan on a depreciating asset” so his only debt is his mortgage. Anyone who has had to take out loans, possibly to deal with the cost of living crisis, will most likely to be best advised to set aside as big a portion of their budget as possible to paying off expensive debt.
The >> budget calculator << needn't be set in stone; you can use it as a working tool. For instance, you might decide that some of your entertainment budget could be more usefully diverted to clearing debt, or saving for a rainy day or even retirement!
Who Else Will Fund Your Retirement?
Here in the UK, the government recognised that as the aging population grows rapidly thanks to improved health-care, funding the state pension was becoming less and less affordable. So they took measures to encourage employers to contribute to pensions and incentivise employees to start contributions too. I've never been employeed at a time to benefit from this initiative, and the rules are almost certainly different in your own country, so do your own country-specific research.
For example, a UK employee I know discovered that if he made massive contributions to his pension in his later years, he could ‘catch-up' on missed contributions. The large deductions were tough at the time, but have been a big benefit to his final pension income.
So if your employer will contribute to your retirement fund – grab the opportunity. When it's deducted from your payslip you'll hardly miss it.
Financial Planning for Retirement
Do you think you'll need less or more income in retirement?
- Well, if you plan to literally retire from society and sit reading quietly at home, sure, you'll probably be able to cut down on your costs for travel and clothes (however remember to budget for increased costs of heating / lighting while you're now permanently at home).
- But maybe – newly released from the 9-5 grind – you have more exciting plans, such as holidays (even in the same country), seeing friends for meals out, or just coffee and cake, theatre trips…. Fill in your own blanks. So with more leisure time available, your costs may increase, just at a time when your income has decreased.
Hmmm – balancing the retirement income budget may be just as tricky as sorting out the monthly budget before retirement.
Elsewhere on the same site I found this >> retirement plan calculator << and it discussed…
Tips For Post-Retirement Income Sources
- As well as the usual sources of income (state pension / social security / 401K) you may benefit from a ‘one-off' burst of retirement income, such as selling your house to down-size, once the children have flown the nest.
- Because we had followed the advice of my Mum and Dad (shown / R.I.P.), we had consistently over-paid on our mortage, so that debt was cleared well before retirement age. In our opinion that was a better use of funds than paying into a pension and holiday spending – but who knows? Everyone must consider their own priorities.
- My own ‘house change' involved re-locating from an expensive London suburb to a house the same size (to cater for visiting family) but in a more affordable area of the UK. A welcome side effect of that move is that I'm within ten minutes walk of beautiful country-side, and a short drive away from my son who left London the minute he could, knowing he had no chance of getting on the property-ladder in London.
- I invested some of the profits from moving out of London into my son's business, and some into dividend producing shares.
- Other savings are in instant access accounts, for my own rainy day costs.
- In the UK we have prize generating (government backed) ‘Premium Savings Bonds'. My winnings are tax-free and, unlike a lottery, I can claim back the original investment within days. Does your country have a safe, tax-free income scheme like that?
- Starting my own part-time online business is something I've enjoyed doing, not only for the income, but to keep my brain active and make sure I have ‘something to get up for' in the morning.
You'll find far more about ideas for post-retirement income and how to adapt them for your own personal circumstances on this >> retirement plan calculator <<.
When To Retire?
That's far too tricky a question for me (or most people) to answer!
One member of my family thought he was wealthy enough to retire, but didn't anticipate the high inflation rate. He soon found himself working again when his income wasn't enough to support even a modest life-style. (And finding suitable work in your 60s can be a challenge.)
The >> retirement plan calculator << can help you (and my son!) work out your required retirement savings.
No-one can accurately predict their financial future. One day you could be in a secure, well-paid, job, the next day, the ‘job-for-life' has gone, in an unexpected wave of redundancies.
A highly paid friend of mine (in his 60s) was riding high one day, then unexpectedly made redundant. He hadn't made large enough mortgage payments to own it outright, so their beautiful house had to be sold. What a sad change from the comfortable retirement they had dreamed of.
The only thing I can recommend is that you (and my son) don't leave yourselves totally unprepared financially for retirement.
The sooner you start the better so that market fluctuations can smooth themselves out over as long a time as possible.
My huge mistake was leaving it too late to plan a retirement income.
The site above (>> retirement plan calculator << ) will be a guide to the factors you should take into account.