My experience is that most people seem to get a mental block when it comes to pensions. It’s a word that seems to make us freeze in the headlights.
So how does one get that all important clarity? How do you get to a place where you can see how it’s all going to look for you? Well, there’s a process you can follow which certainly should help.
Your ‘Current’ Spending?
A lot of us think we have a pretty good idea of what our current lifestyle is costing us. You probably know if you’re living within your means or not, but does that mean you know what you’re ACTUALLY spending your money on? Getting to know what you’re spending might not be top of your to-do list but it’s vital to have this clarity.
Take some time to work it out. Yes, that will mean going through your bank statements with a strong coffee (or something stronger!) and really getting to know your spending habits. Once you get your head around it, you should find it quite enlightening, I promise!
Your ‘Have Fun’ Spending
When you finish work (or, what we call become financially independent), you’ll enter the ‘have fun’ stage of your life. This is when you’ll want to do all the things you wanted to but couldn’t because you were working.
Think about your life after work and what it will cost. Do a similar exercise of looking at your spending as you did just now, but adjust it to what life might look like. There’s going to be a fair amount of guessing but that’s OK, it’s still valuable.
Your ‘Too Old’ Spending
This will happen to us all. You’re going to get to a point where you can’t quite do what you used to be able to. Your knees have gone and getting up the stairs might be a challenge, let alone a mountain. This is the ‘too old’ stage of your life.
Think again about what your spending during this stage will look like. Typically, your spending will go down because you’re not able to do as much.
Your Guaranteed Income
We’ll all have some guaranteed income after work. For some, it might just be the state pension. For others, it might also be a final salary pension. Guaranteed income is the income that won’t change, regardless of what happens in the financial world. It’s secure, reliable income.
You need to know what this income will be because it’s going to contribute to your ‘have fun’ and ‘too old’ spending stages. It’s the foundation of your future security.
Filling the Gap
There’s usually a gap between your future spending and your guaranteed income. Your other resources (private pensions, investments, cash, etc.) are there to fill the gap.
We need to know how big this gap is and if your other resources can plug it. This is so IMPORTANT because, if the gap can’t be filled, there’s going to be problems. You might need to reduce your lifestyle in the future or even work longer which isn’t great. That said, it’s important to know.
Keeping Things Sharp
So, we know what you think you’ll be spending. We know what guaranteed income you have. We know if your other resources can cover the gap. This is all good stuff. Another important thing to do is to squeeze the most out of your resources to make them as efficient as possible.
This will include such issues as making sure:
- They’re tax-efficient
- The costs are reasonable
- You have all the flexibility you need
- There are others, but I won’t bore you!
Yes, this part is a bit technical but it’s important to get it right. Poorly arranged resources can have a big impact on their ability to fill ‘the gap’.
It Will All Be Wrong!
I’m asking you to make a bunch of assumptions with your spending. I’m asking you to assume nothing unexpected will happen in the future. I’m asking you… to live like a robot!
Of course, one certainty of life is that nothing’s certain so it’s impossible to predict what’s going to happen. That said, it makes a lot of sense to me to have some sort of plan and to review it regularly to ensure you’re really well placed to adapt when the unexpected arrives at your door.
It’s My Problem Too!
I hope I don’t come across as a ‘know-it-all’. I’m certainly not. The steps I’m suggesting you take are the steps I’m taking myself and it’s not easy!
I’m thinking about what I want my future life to look like. I’m considering what my spending is (and what it will be), I’m looking at what my guaranteed income will be and what other resources I have to fill the gap. What I’m talking about here is stuff we’re ALL going through.
We’re talking about life so we’re talking about uncertainty but having some sort of idea of what you want the future to look like and knowing if your financial arrangements can take care of it is an empowering process to go through.
What A Load of Waffle?
You might think this process won’t help. You might feel everything’s going to be OK. That’s completely fine. Trouble is, if you don’t plan, you’ll only find out when you get there, and you could be wrong! I think it’s better to know in advance.
If you pull a tigers tail, just because it doesn’t bite you, doesn’t mean it’s not risky!
Speak to you soon…