Anyone in this position now would be forgiven for being worried by the recent decline in markets caused by the pandemic currently gripping economies, and how all this will impact upon their retirement prospects. Such dramatic market movements are unhelpful at the best of times but are thrown into even sharper focus when you begin to weigh up your retirement savings and work out the kind of income you may have to live from when you quit work.
However, it doesn’t have to be a time for despair. If you’re 10 years or so from retirement you have time to adapt, to plan and to arrange your saving so you can navigate not just the tricky period markets find themselves in now, but the longer term when a semblance of normality returns - as it surely will.
Here’s what you need to know.
Work out how much you’ll need
Now is the time to understand exactly what kind of retirement you want and can reasonably expect to achieve. It’s normal for income to be lower in retirement than during your working life, of course, but it’s also true that outgoings are also lower as the costs of housing and bringing up families fall away for many people.
How does your likely retirement income stack up against your likely costs? What will you be spending on leisure in retirement? What will you want to spend on travel and seeing family?
Fidelity’s Retirement Calculator is a great way to form answers to these questions. It shows you the average cost of a range of activities and essentials - from holidays to home maintenance - and then asks you to adjust these levels to suit your desired lifestyle in retirement. Finally, it puts a figure on the kind of income you’ll need to pay for it.
It’s just an estimate but it will help you visualise your retirement goals.
Take stock of savings
This can be the painful bit but don’t worry, you always have options. Having worked out where you want to get to, now you need to work out the progress you’ve made - and what you need to do to get there. To get the complete picture you’ll need to understand what you have saved in pension pots built up during your career, other savings and future income from other sources - such as final salary pensions or buy-to-let property.
The events of the past few weeks have made the picture for pension pots look worse - double-digit stock market falls will do that. Nevertheless, properly understanding your current level of retirement saving is critical to knowing what still needs to be done.
Once you have a firm idea of the savings you have now, you can work out what kind of income in retirement you are headed for. Fidelity’s MyPlan tool can help you do that. It asks you to enter details like your age, current monthly savings and existing savings pot, and the level of retirement income you think you’ll need.
Then it tells you the amount in savings you’ll need at retirement to achieve it - and the level you’re on track to achieve. If there’s a gap between the two, it will show you how much you need to make up.
You can play around with different variables to show the differences that changing course now might make - be it by delaying retirement until later, upping contributions now or investing more adventurously.
If you find you are still some way off meeting your target, don’t worry - many people are. What’s important now is that you understand the scale of the task facing you and act to get things moving in the right direction.
Bringing together pension pots from different employers can help because it lets you see their combined value easily and in one place. It also helps you understand how your money is invested, so you can ensure you are properly diversified for the years ahead. If you think you’ll benefit from consolidating, however, check that you won’t be giving up valuable benefits from old schemes.
The good news
While steep market falls are tough there can be silver linings - if you look hard enough. At ten years out from retirement, your invested pension money does have time to recover. No one knows where prices are headed from here but previous market crashes have come and gone before.
What’s more, the lower prices we’re seeing mean that any contributions you make from now on will purchase assets at a cheaper price. It’s often the case that workers will ramp up their pension saving in the years immediately before retirement. Salaries at that time tend to still be high compared to the early part of your career and many of the costs of family life may have dropped off.
If that applies to you then investing more into a recovering market could work in your favour.
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Important information:The value of investments can go down as well as up, so you may not get back the amount you originally invest. You can't normally access money in your pension until 55. Investors should note that the views expressed may no longer be current and may have already been acted upon. Pension transfers are a complex area and may not be suitable for everyone. Before going ahead with a pension transfer, we strongly recommend you compare the benefits, charges and features offered. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.