The 5 years before retirement retirement are important for getting organised and understanding the tasks ahead. It can be a great time to lay the groundwork for a smooth transition into retirement.

Hi, I am Simon Alexander, founder of Streamline Financial Planning and I help people make the most of their finances in retirement!

In my line of work, I often come across a common scenario. Many people tend to procrastinate their planning for retirement. The most common phrase I hear is ‘I wish I had done this earlier.’

So today, I want to share 5 key steps you need to think about 5 years before retirement.

As always, I will be talking about pensions and tax so please take a moment to read the risk warnings at the end of this script. This video is only for educational purposes and is not financial advice. If you are unsure about your plans for retirement, then I would encourage you to speak to an independent financial advisor.

Ok, now back to the video.

Step 1 – Retirement Goals & Ambitions

Before we dive into the specifics of financial planning, the number one key consideration is identifying your retirement goals and ambitions.

For many of us, our careers have taken centre stage, often forcing us to put personal dreams on hold. Consider the sacrifices and compromises you’ve made along the way. Have there been any activities you have wanted to do but had to postpone? At the end of the day, what brings you joy and fulfilment?

Write down your retirement goals and ambitions. Is it that epic cross-country road trip, learning a new language or musical instrument, or finally starting that dream business?

Now, you might be wondering, why should you start this process at least 5 years before retirement?

Well, it’s because many of us tend to focus on what we’re leaving behind in our careers, rather than what we’re moving towards in retirement. Crafting a fulfilling life for yourself during retirement involves adjustment, planning, and preparation. Having a clear plan of action for the next 5 years can make all the difference.

By taking the time to identify your retirement goals and ambitions early on, you’re setting yourself up for success. It gives you the opportunity to make any necessary adjustments, plan for the future, and ensure that you’re on track to live the retirement lifestyle you want.

If you’re finding it challenging to define your retirement goals, consider asking yourself three questions. These questions, developed by George Kinder, a well known Financial Planner in the States and often referred to as the father of life planning, are designed to help you gain clarity on what truly brings you joy and fulfilment.

By prioritising what matters most to you, you can create a roadmap for your ideal retirement lifestyle. I highly encourage you to give it a try! I have added a link here.

Step 2 – Estimated Retirement Spending

Understanding your estimated retirement spending is the second important consideration. The best place to start is to understand how much you are spending today and then anticipated any future costs that you may occur in retirement.

What you want to do is break down your expenditure in three categories: Essential, Lifestyle and Discretionary.

• Essential expenditure is the committed outgoings such as basic living expenditure such as food, council tax, household costs etc. These bills that you must pay, and which are very difficult to reduce.
• Lifestyle expenditure supports your expected standard of living such as holidays and eating out.
• Discretionary expenditure covers luxury items and gifts that you may want to make.

These three categories cover the regular ongoing expenditure in retirement.

You might be wondering about the significance of categorizing your expenses. The importance lies in its ability to provide a clear picture of the extent to which you depend on your retirement portfolio to cover your ongoing costs. Moreover, it offers insights into potential areas where you could make reductions if needed.

The next thing to consider is any large one-off costs that you may incur during the first couple of years of retirement. This could be going on a around the world cruise, doing a house renovation or even paying off your mortgage.

The reason why we need to factor these large costs in is that you do not want to be withdrawing funds out of your retirement portfolio at the wrong time. Withdrawing funds at the wrong time could trigger taxes and jeopardise your portfolio’s value, especially if the markets are on a downturn which may not be a great result for your overall retirement outlook.

Step 3 – Retirement Assets

The third step is to gather your financial assets and build your balance sheet. Add up how much you have in wealth and how much of this will be necessary to pay for your retirement lifestyle.

I suggest as you gather this information you begin to understand the following:

Investments & Risk

Check how your pension and other investments are allocated. Are the funds too risky or too cautious and how diversified are they?  If your pension uses a life-styling strategy, understand how it may automatically shift to less growth investments as retirement approaches. Ensure this aligns with your risk profile and retirement goals.

Costs & Charges

Check the costs and charges. I can never stress this enough. It is something that we can easily control and by reducing the costs of your investment portfolio can be an easy win. So, breakdown exactly what you are paying for such as platform fees, fund charges, adviser charges.

Here is an article that goes into the average wealth management fees in the UK. To give you an idea, if you are paying a total cost of more than 1.50% of the value of your portfolio, then I would consider that to be very high.

Pension Enhancements

Not all pensions are equal. So, explore if your pensions have any enhancements or guarantees. These can be valuable in generating a secure retirement income and may be lost if you decide to move your pension elsewhere.

Defined Benefit Pension

If you have a defined benefit pension, understand when it starts paying, how it escalates each year, and any lumpsum entitlement. This type of pension provides a guaranteed income in retirement.

State Pension

Like a defined benefit pension, the State Pension offers a guaranteed, inflation-linked income during retirement. This can go a long way to cover the essential expenditure that I spoke about earlier. So, you need to ensure you have 35 qualifying years for the full benefit. You can check your State Pension entitlement by going to gov.uk/check-state-pension – I have added the link below.

Please note, if you haven’t completed a full 35 years of National Insurance Contributions (NIC), you can review your NIC record back to 2006. You have until the end of the current tax year to check for any missed NIC years since 2006 and make necessary top-ups. This could significantly boost your State Pension benefits, so it’s worth considering before the deadline.

Non-Liquid Wealth

Finally, if you have non-liquid wealth like a business, start thinking about how you’ll realise funds from it to help you cover your retirement expenditure.

Now, why is it crucial to gather this information at least 5 years before retirement? Well, you might discover that your investments aren’t aligned with your retirement goals or that you’re paying excessive fees. Or, you are a business owner that will need to find a plan to sell your business or put in place a succession plan.

Addressing these issues early on can significantly impact your long-term financial well-being.

On another note, you shouldn’t forget about any liabilities. For instance, understanding the timeline and strategy for paying off your mortgage, whether before or during retirement, is vital. This is crucial as it can influence your retirement income plans.

Step 4 – Cash Flow Forecast

Once you have gathered your retirement assets, it’s time to move on to step 4: creating a cash flow forecast to project how long your funds might last. Cash flow forecasting is a useful tool as it considers your income, expenses, assets and liabilities, and other assumptions, to project into the future. It is useful as it helps provide a high-level view of the risks that you may face and the likelihood of you have a successful retirement or not.

By doing this exercise 5 years before retirement you can understand the likelihood of how long your money will last in retirement and start planning on a withdrawal strategy of how you will generate that sustainable and tax-efficient income.

Even more crucially, this analysis can guide us in determining how much we need to save over the next 5 years.

And this then prompts us to ask some important questions: How much can I comfortably set aside? Should these savings go into a pension or an ISA? Should I take advantage of my employer’s pension matching program? And what about salary sacrifice? These decisions can significantly impact your financial future, so it’s worth exploring them carefully.

Step 5 – Consdier Phased Retirement

And lastly, step 5 is considering a phased retirement. Hopefully in the next 5 years you can make work optional. Meaning you have the choice to leave your employment and not have to work another day!

But please don’t forget the importance of taking a ‘phased retirement’. This is where you have the option to work on your own terms and earn an income whilst reducing your hours/days.

There are many benefits to this. By continuing to earn an income, you will delay the need to draw down on your investments and preserve your retirement savings for longer. This can provide greater financial security and help to maintain a comfortable standard of living throughout retirement. The cash flow analysis should demonstrate this quite well.

Continuing to work can be beneficial from a social and personal perspective. Work provides opportunities to stay engaged, active, and socially connected. This can help to maintain a sense of purpose and fulfilment in retirement.

By taking a phased approach, you can gradually transition into retirement. This can help to ease the emotional and psychological adjustment that often accompanies this major life change.

Once again, I’m Simon Alexander and I hope you enjoyed the video explaining why the 5 years before retirement are important. If you have any questions about your plans for retirement then please do get in touch.

Simon is a Chartered Financial Planner based in Tunbridge Wells, Kent but works with clients all over the UK. Please do book in a call if you have any questions about your plans for retirement:

Risk Warnings

• The value of your pension may go down as well as up and you may get back less than you invest.
• Past performance is not a reliable indicator of future performance.
• The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
• A pension is a long-term investment, the value of your investment and the income from it may go down as well as up. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
• Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
• The Financial Conduct Authority does not regulate Cashflow Planning.