Six questions to ask yourself for a secure financial future

Thinking about the perfect time to retire is a very individual decision.

For some people the right time is determined by reaching a certain age, while others work towards reaching a certain amount of pension and savings as the trigger to move into the ‘golden years’.

But whatever the prompt, planning your finances to be sustainable for the long term is key.

Certainly the turbulent times we’re living through have given many people pause for thought to consider their work life balance and think more seriously about what their future holds. Here Fairstone Independent financial adviser Jennifer Fraser looks at six considerations for anyone looking to retire.

What impact could inflation have on my retirement plans?

Inflation is a major factor when planning for retirement as it can reduce the purchasing power of your money over time.

Not only does inflation affect the eventual value of your pension while you’re making contributions, it can also affect how long the pot you’ve built up will last when you stop contributing and start drawing an income.

If the amount you receive in retirement is based on a fixed income, it will not be able to keep up with future inflationary rises, meaning that you may likely be unable to afford the same lifestyle that you enjoyed before retirement.

Therefore, it is essential to plan for retirement by ensuring that your savings and investments are able to grow in real terms, above the rate of inflation. This can be done through a combination of investing in assets that aim to provide returns above the rate of inflation, as well as ensuring that your retirement income is not linked to a fixed amount but instead grows with inflation over time.

What is my retirement timeline? 

Life planning is key to a successful retirement and when planning for your golden years, it’s best to get a strategy in place well in advance of your intended retirement date. This will provide you with sufficient time to get a full understanding of your financial situation as well as to recognise any potential issues or opportunities for improvement.

You should consider everything from age, income level and lifestyle when considering your retirement timeline as they will all have an impact.

People who have given serious time and thought to what they will do after they retire will generally experience a smoother transition than those who haven’t. Dreams and goals that cannot be achieved with a single trip or project may translate into long-term, part-time employment or volunteer work. But it is never too soon to begin mapping out the course of the rest of your life.

Ideally, you should start saving for retirement in your 20s and 30s, even though your retirement will seem years away. By doing this, it will give you the added time to build your savings and ensure that you have enough money to comfortably fund your retirement.

And of course, if you find yourself nearing retirement without a plan in place, you can seek professional financial advice to help you optimise your retirement plans.

Could retirement cash flow modelling help me?

Retirement cash flow modelling is very useful in making assessments about your future requirements. It enables you to consider all of your potential sources of income in retirement and how they can best be used to meet your expenditure needs.

Cashflow modelling can show you what is possible, what isn’t possible and what you can do instead to get you to where you want to be. It provides a graphic representation of your personalised roadmap, highlighting your goals and objectives along the way.

This means considering a number of factors such as your underlying investments, tax and, most importantly, how well your different income streams are protected against inflation. Another benefit of using cash flow modelling is that you can easily change those assumptions if your circumstances change, factoring in different investment returns, tax rates and inflation. This allows you to assess how much you need to have accumulated prior to your retirement.

Would an annuity be beneficial?

Retirement is an important milestone in life, and it’s essential to make sure you have enough money to ensure a comfortable lifestyle afterwards. One option is to consider an annuity.

With fewer employers now offering the guarantee of a final salary pension, annuities could be an appropriate option to consider. An annuity provides a regular income for the rest of your life, and can make sure you have enough money to last you throughout retirement. One drawback to them though is that they typically do not provide lump sum death benefits and in most cases, your annuity dies with you.

But in order to decide whether an annuity is right for you, it’s important to look at the different types of annuities available, consider the tax implications and other factors such as inflation. To offer protection from future inflation, it could be worth considering an inflation-linked annuity, where annuity payments increase each year in line with rising costs.  Other factors that can influence the returns from an annuity are your health and smoker status. If you are in poor health or are a smoker, the rates offered tend to be higher.

Am I sitting on too much cash?

Even during periods of high inflation, investments that are in real assets can provide a hedge against the erosion of wealth. Whilst it is important to maintain a suitable emergency fund in cash to cover unexpected bills and other eventualities, high levels of cash holdings are ill-advised in this situation as the current interest rates barely meet inflation and its real value is guaranteed to decrease. Investing in assets is one of the best ways to safeguard your retirement savings against the effects of inflation.

Inflation can erode the value of your savings over time. By investing in real assets, you can help to ensure that your retirement savings remain secure even in a rising inflation environment. Investing in assets can provide you with the opportunity to create a sustainable and secure retirement plan that is protected from the effects of inflation. Ultimately, investing in real assets is an important part of any comprehensive retirement savings strategy.

What is my attitude to investment risk?

When making investment decisions, you need to determine the level of risk that you are comfortable with. This will vary from person to person, so it is important to obtain professional advice to help you assess your risk tolerance. Understanding your attitude to investment risk is an important factor when planning for retirement and taking the time to learn about how you respond to different kinds of market volatility and levels of risk will help you create a more informative and effective retirement plan.

Knowing what kind of investor you are – conservative, balanced or aggressive – will enable you to make informed decisions about where to invest your money and how much risk you are comfortable taking on. It can also help you avoid some of the common pitfalls associated with retirement planning, such as being too conservative or overly aggressive in your approach. This will help you to save and invest more effectively, allowing you to make the most of your retirement savings.

There is no right or wrong attitude to risk. Risk is personal to you and is based on your circumstances, your goals and ultimately whether the thought of investing makes you feel nervous or completely calm or somewhere in between – and also how you react to market ups and downs.

Once you’ve worked out your approach, you can start building a pot that reflects how you feel about investment risk. Your feelings may change over time – but you can adapt your position as necessary.

Do you need help you with your retirement plans?

Planning for retirement is a complex business and there are many different options available. Taking expert financial advice can help you sift through the many rules and product options available and help construct a portfolio to maximise your prospects and help you make sense of your future, whatever that may look like.

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS PLAN HAS A PROTECTED PENSION AGE).

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.