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The three stages of planning for your retirement

December 2017

Tags: Retirement

Planning for retirement can be daunting, whatever age you are, and it’s not just working out what you’re going to do with all of that newfound free time that’s an issue.


Increasingly there is anxiety about how long you will need your pension to last, how you will make sure it keeps pace with inflation, and, of course, the simple question of whether you saved enough in the first place.

Understanding how much you might spend in different phases of retirement is one crucial part of this, while realistic projections about the performance of your pension are helpful too.

The first step is to work out how much you already have in terms of retirement savings. Don’t just consider your pension as ISAs, savings accounts and even your property may be a part of your retirement plan. 

If you think you might have ‘lost’ a pension - such as one with a former employer, then the Pension Tracing Service can help. They can be contacted on 0345 6002 537 from 8pm to 6pm Monday to Friday.

For employer pensions you can write to the trustees to request a forecast, to tell you what the pot might be worth when you retire, while it’s worth taking your entitlement to the state pension into consideration as well.

But knowing what you’ve got is only half of the battle when it comes to a retirement strategy. The other side of the coin involves knowing what level of income you will need, and for how long, to retire comfortably. There are tools available - including Equiniti’s RetireMe app - to tell you how long your pension funds will last based on time or annual drawdown.

Download the RetireMe App from the Apple App Store

We took to the streets to ask people what they think makes for a happy retirement and how they think they would fund it. We found that the majority of people have yet to make any real long-term plans for their future finances.

ONS figures suggest that men and women aged 65 years could expect to live for an additional 18 to 20 years so you should be planning for your cash to last for at least this long in most cases.

In conjunction with tools and statistics, it’s important to have a realistic figure in mind about retirement spending. Don’t overlook the fact that retirement isn’t just one phase in your life. Instead it is several different phases of health and activity, during which your spending requirements will change.

The first phase of retirement is often known as the ‘active’ phase, at which spending can be higher as the newly retired realise their dreams to travel, improve their home or take up a new hobby. However, many pensioners may choose to continue to work at this stage, which can help to boost their retirement income for later.

The second phase of retirement is known as the ‘passive’ stage - and when you enter it depends on health and outlook. Those who retire early or remain in particularly good health may have a longer active stage. During the passive stage retirees travel less and spend less on other leisure activities. However, although spending falls, because this phase comes later in retirement, it is also at the point where you may find your spending power eroded by inflation, unless you’ve taken steps to protect your investments against the slow motion decrease in pension value caused by rising prices.

Ensuring you have a strategy to deal with the third phase of retirement - sometimes known as the ‘supported’ phase, is important. Often money is needed to deal with nursing care, or with moving into a care home in many cases. It’s at this point that the pension may well not be enough and people use other assets such as the equity in their home.

Retirement spending is therefore U-shaped, with most people spending more at the beginning and the end, and less in the middle. Creating a strategy to last for the whole of retirement means that you need to take these three phases into account. Decide how much cash you are comfortable with using within the active phase of retirement, and ensure that you have a plan for the supported phase in place.

Leaving your money in your pension pot, or opting for income drawdown can give you that flexibility, but this means you do not get a guaranteed amount of money each year and you risk your money going up as well as down with the movements of the stock market.

Knowing how much you’ve got and how much you might spend allows you to assess any shortfall you might have. Planning to work for longer (perhaps part time) and trying to save money on day-to-day living in order to invest more for the future are two strategies to help to deal with this.


Rosie is an independent personal finance journalist who has been writing for top national newspapers since 1996.

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