How long your income will last in retirement is key to your financial planning By Darren Williams, Managing Director of BALPA Financial Solutions ome of the most common questions we get from BALPA members are around pension benefits. Often, members will have received a pension statement and want to ask what it all means. Thisis not unreasonable, as the financial services industry is renowned for jargon and confusion. However, we have noticed that questions are often related to the retirement date on the statement. In many instances, people set themselves a date when they expect to retire. Yet, as was once stated by the heavyweight boxer, George Foreman: The question isnt at what age I want to retire, its at what income. Retirement planning should be more than simply looking at how much your pension will provide and then hoping for the best. It should be about considering what it is you want from retirement, how much income is required to achieve that, andwhere that income will come from. So before you consider how much pension income you will get at your planned retirement age, why not ask yourself a more important question what are my retirement plans? This is hugely important. Organising your finances in readiness for retirement is hard enough, but to make this worthwhile you need to spend some time considering exactly what you plan to do in retirement. Dont think this only applies to people nearing the end of their careers. The earlier you start planning, the better your retirement will be. Whats the first thing that springs to mind when you think about your retirement the chance to spend more time with the grandchildren, finally starting that book, or throwing yourself into your hobby? Whatever it may be, the first thing you need to do is plan. Your retirement could be the biggest and longest holiday you ever had and, just like most holidays, the more effort you put into organising it, the better the trip becomes. Whatever your plans, you still cant get away from the fact that probably the most important aspect is money. This is a classic chicken and egg situation. Do you plan your retirement and then work out how much income you need, or do you see how much income you have and then plan your retirement? Lets look at a way to calculate your retirement income. Your income in retirement It is broadly recognised that people require about 60% of their working income in retirement. While fixed costs such as utilities and council tax remain the same, obvious savings inretirement include commuting and other work-based costs including no longer paying into pension plans. A slightly more detailed way to consider retirement income is to do a budget analysis. The best way to do this is to consider four key elements you will need from your income in retirement: nYour monthly and annual fixed outgoings These will be your utilities, payments for the car, insurances and food. nYour day-to-day money This is simply what you need to go about your daily business coffees, lunches, the odd trip out. You may also incorporate items such as annual subscriptions and charitable giving. nRainy-day money This is to pay for emergencies, such ascar or house repairs and unexpected bills. nMajor expenditure This covers things such as holidays, car replacement, or a new kitchen. The first two sections will need to be covered by money in your current account and the third will normally be financed from cash in a savings account. Your major expenses such asholidays, car replacement and that sort of thing must still be deemed as expenditure, but may not necessarily be met out of your annual income. This should give you an idea of what sort of income is required. Remember what George Foreman said, its not your age that should drive retirement, but your financial situation. There are two further things to consider: nDoes your income need to remain the same in retirement? nHow long does your income need to last? Your income needs will clearly be driven by life expectancy and you will also have different income needs as you progress through retirement. So your income in retirement will need to be flexible to meet these requirements: nEarly retirement, high expenditure When you first retire, you may want to do READ MORE many of the things you have always wanted to do. This will feel like the perfect time to climb Mount Kilimanjaro, its a great opportunity to visit North Carolina, South Korea, the West Indies or even East Anglia. Whatever it may be, there are normally cost implications and they must be built into your expenditure plans. nMid retirement, low expenditure Once you have settled into retirement and the vast plains of East Anglia have been explored, it is more likely your biggest challenge will be the hedge that needs trimming. You may find your health is not as good as it was or you simply wish to enjoy the peace and tranquillity that retirement brings. Broadly, you can expect your income requirements to be lower than they were - but, of course, this will differ from person to person. nLate retirement, potential high expenditure Sadly, very few people live through retirement without any health issues, and the older you get, the more expensive this can become, with potential care costs a genuine concern. Finally, how long is long term? Its paradoxical that the idea of living a long life appeals to everyone, but the idea of getting old doesnt appeal to anyone. Longevity is clearly an important issue and one where advice is crucial. Working out how much income is enough is clearly a detailed calculation, but one that is also full of what ifs. You must consider all scenarios, preferably before you get to your retirement date. It is quite clear that planning for retirement is not a simple process but, by using sophisticated planning tools and support from a financial planner, you can start to think more carefully about the level of income you need in retirement and which of your assets will drive that income. Then, once that income has been calculated, we can provide a plan to ensure that your retirement is not full of dreams, but full of memories. READ MORE If anything resonates with you in this article, or you would like to discuss your own financial planning, we would be pleased to hear from you. You can contact the BALPA Financial Solutions team on 020 8476 4100 or email bfs@balpa.org For more information, visit www.balpa-bfs.co.uk FINANCE Its not how much youve got, but how much itll give you