When it comes to your retirement, the stakes are high. There are plenty of tips out there, but some should be taken with a pinch of salt.
Nick Colman, Financial Planning Writer
Last Updated: 6 April 2023
Tips for your finances can be similar to the tips you might read about health and fitness. It all depends on what your goal is and what works best for you.
A marathon runner wouldn’t train in the same way as a weightlifter. But there will be some general rules that will apply to both. For example, they’ll both need to consume enough calories to fuel their training and help recover, but how much they need might be different.
In the same way, there are tips about retirement that will need to be applied in different ways for different people.
Here are three rules of thumb and how to apply them.
This isn’t personal advice. If you’re unsure what’s best for your situation, seek personal advice. You can also get free, impartial retirement guidance from the government’s Pension Wise service.
Reducing the risk of your pension will look different to the next person. There’s no one-size-fits-all approach.
If you want to take less risk, then you could consider reducing how much you have invested in shares. Holding short-dated bonds or cash could be a better option if you want to avoid the ups and downs that come with being invested in the stock market.
You’ll need to check where and how your pension is invested. Our survey in October 2020 revealed that out of 1,000 people building their pension pots, over a third didn’t know how their pension was invested. After all, you can’t reduce your risk if you don’t know how much risk you’re taking in the first place.
You might also have a workplace pension. If you’ve never touched your workplace pension, it might be that it was set up a long time ago with the expectation that you’d retire at a certain age. Some workplace pensions automatically reduce risk as you approach retirement age. Sounds great on the surface, but this will be a fairly blanket approach and not necessarily the best course of action for you.
Finally, you’ll need to decide when to start drawing an income from your pension. For some, this doesn’t always happen at the same time as accessing a pension lump sum. Knowing how much you need and when will help you decide when to reduce risk and switch to start taking income from your pension.
It’s always sensible to put some cash aside to help with any out-of-the-blue expenses, or if your income takes a hit.
While you’re working, your cash reserve can be smaller, but it’s still best to have an emergency cash fund to cover any unexpected bills. How much to have will vary, but it’s normally a good idea to have roughly three-to-six months’ worth of spending tucked away.
As you draw closer to retirement, take a look at your cash savings pot and if you’ve got spare income, think about topping it up. You’ll generally need more emergency savings when you’re retired. That’s because you probably won’t be earning as much.
Where you fall on the one-to-three-year scale will depend on your essential spending. Although you can’t predict when or why you might need emergency cash, there are some things you can do to help reduce the impact:
Understand your essential spending. This might differ from person to person, but generally monthly outgoings like utilities, mortgage payments and groceries should be considered.
Use our household budget planner to help you visualise what you might be spending money on.
Your emergency fund should be held in an easily accessible savings account. But for other cash savings, you could use fixed-term savings accounts (which tend to offer more attractive interest rates but can’t be accessed until the term has ended).
The Active Savings service can help make cash savings easier to manage.
It’s important to know how much to hold as cash and how much to invest. Over the long term, investing in the stock market has given better returns over holding cash. Remember, though, unlike cash, investments can fall as well as rise in value, so you could get back less than you invest.
You might not have had to ‘find X’ since your school algebra lessons. But when it comes to retirement, finding this particular ‘X’ is extremely important.
The Pensions and Lifetime Savings Association (PLSA) suggest that a couple will need about £34,000 per year to live a ‘moderate’ life style and a single person will need about £23,000 per year*. The PLSA say ‘moderate’ means more financial security and flexibility than just covering your basic needs.
But in reality, retirement isn’t the same for everyone. Moderate or comfortable can mean different things. For some, it’s a chance to finally spend more time on hobbies. For others, it’s the time gained to go exploring, or even fulfilling life-long dreams – however big or small they might be.
To get an idea of whether your retirement income can maintain your lifestyle, take a look at how much your pension pot is currently worth. Make sure you try to have enough income for the next twenty to thirty years.
As people are living for longer, you should try to calculate your retirement income based on how long you’re approximately expected to live for.
Use our range of retirement calculators to help you get a better idea of how much you’ll need for retirement.
*PLSA Retirement Living Standards Jan 2023 - figures are based on people living outside London in retirement.
When it comes to something as important as your retirement, simple rules of thumb may not be enough.
For clear, definite answers and a well-thought-out plan, you should consider financial advice.
A financial adviser can apply all these rules to your personal situation and needs to work out what’s suitable for you. After taking advice, you’ll have a clear idea of:
When and how to get your investments ready for retirement
Ways to generate the income you’ll need in retirement
How much you need for the duration of your retirement
Where you’re invested and why
If you’re facing a situation where you think personal financial advice could add value, our professional advisers can help.
The first step is to book a call-back with our advisory helpdesk to talk through how advice works and what charges might be involved. They won’t give advice on the call, but they’ll help you get a better idea of whether it’s right for you. Then, if you want to take advice, they can put you in touch with an adviser.
We can provide advice to only UK residents. If you’re resident overseas, unfortunately we’re unable to advise you.
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