It’s never too early to start planning for retirement. That’s because it tends to hit us suddenly that there’s plenty to think about – and a lot to actually do. But if you approach it logically and methodically, it’s actually not that hard to plan and then act. In this article, we will take you through the eight key steps you should take for smart retirement planning and investing.

1. What will you do when you retire?

Retirement is a time for trying new experiences for lots of us – travel to exotic destinations or taking up a new hobby perhaps. But it can all cost a considerable amount of money. Even community activities and volunteering, or spending more time seeing the family, are likely to have some financial cost to them.

Moreover, even if you just want to put your feet up most of the time, you’re likely to still want to keep up a similar standard of living to what you have now. Or you may hope to have a few more everyday luxuries, such as eating out regularly, or buying items you’ve always wanted.

Think too about what you might do with your home. Will you spend money improving it? Or downsize to somewhere smaller – and perhaps cheaper? Maybe move closer to family members? Could you even relocate abroad?

Even if your plans change, simply thinking about what you’ll do and how you’ll be able to do it is time well spent. The age when you retire will also be a factor here. Retire early, and with luck you’ll have many years when you’ll be active and maybe travelling – and likely spending more too.

2. When will you retire?

For many people, the age of retirement is very much a personal choice. Some can’t wait to retire. Others hope never to. Many are somewhere in-between the two, preferring to be able to work part-time or when the mood takes them – in particular, a lot of self-employed people feel this way.

The main thing is to think carefully about when you want to stop or cut down on work and plan your finances accordingly. The age when you’re eligible for the state pension can be an important factor in this planning. Currently, it’s set at 67, but that’s likely to rise to 68 sometime between 2037 and 2039.

But for other people, the age when they retire may not be down to personal choice. You might lose your job and find it very hard to get another. An illness or injury might prevent you from working. Family circumstances such as the need to care for someone can be a factor too.

There’s a third factor to bear in mind too – how long might you be retired for? Longer life expectancy means that many people are retired for over 30 years nowadays, and for some, retirement can last over 40 years. Factoring this into retirement planning will help ensure that you don’t run out of money.

3. Where are you now – assessing your financial situation

Now that you’ve got a clearer picture of what your retirement looks like, your next step is to work out what you currently have, and what you might have available to you once you retire.

Collate any other investments, such as savings or individual savings accounts (ISAs). Factor in any likely inheritances you may receive. It’s also important to consider what kind of debt you may have (if any) and if are you managing it appropriately.

You may already have a workplace and/or private pension. If so, find out what they’re currently worth and how your money is being invested, as well as what they might be valued at when you retire. If you’re not sure whether you have a pension, the government offers a free Pension Tracing Service.
If you own your home, look at what it might be worth when you retire. How much money would you realise if you moved or downsized? What if you opted for equity release, borrowing against or part selling your home?

Buy-to-let property is obviously another important asset, but forecasting tax regulations and the state of the property market when you retire won’t be straightforward. So beware of being over-reliant on it to fund your retirement.

You may also have invested in stocks or shares, in antiques, gold or other precious metals, or in many other asset classes. These can be subject to significant fluctuation, so be wary of overdependence on them.

Whatever you have or plan to invest in, remember to take inflation into account when assessing current and future assets, as well as expenditure.
Above all, remember that you could be retired for a very long time – and you really don’t want to run out of money.

4. Talk to the professionals and formulate a plan

Once you have established what your retirement to looks like and your current financial situation, seeking professional advice to formulate a plan is always a great idea.

There are two types of financial professionals who are worth contacting. The first is a financial planner, who can help you work out exactly where you are now. They can also produce a lifetime cashflow plan for you so that you can get a better understanding of your income and expenditure over the course of your life, including retirement.

Factors to consider include working out your investment horizon. How long will you be investing for? How much income might you need – and how long for? Will your current investments cover it?

If you already have a pension, do you need to increase your contributions? Would you be comfortable spending less now and saving more so you can hit your goals earlier?

The other professional who could help you is a financial adviser – in particular independent financial advisers (IFAs) who aren’t restricted in the advice they can give. Some financial advisers also offer financial planning assistance.

Financial advisers’ main task is to advise on suitable pensions or investments. Your investment horizon is related to this, as is defining your risk appetite – how much risk you are prepared to take in order to achieve your financial goals. This can change over time, of course – for example, many people prefer to take fewer risks when they’re closer to retirement.

5. Develop an investment strategy

Once you’ve assessed all the factors above, it’s time to develop an investment strategy that’s closely aligned with your goals. This can be done with the help of your financial adviser, should you choose to use one.

Remember that the most important factor is to start investing as soon as you can. It’s also worth considering any allowances you might have (ISA allowances, tax relief and so on) and how you might maximise them.

ISAs are generally an attractive and tax-efficient way of saving, and many people choose to have ISAs alongside their pension. Their main advantage is that they’re flexible and tax-free when you save and when you take money out. However, you can only save up to £20,000 a year currently. Their very flexibility can also mean that it’s tempting to take money out before you retire.

The big advantage of pensions is that you receive tax relief on your contributions, up to £40,000 annually currently. With workplace schemes, your employer will typically contribute to your pension as well. With pensions, you can’t take money out until you retire.

There’s also no income or capital gains tax over time. From the age of 55, you’re able to access your money and can take up to 25% of your pension tax-free. Further withdrawals count as regular income, so will be subject to income tax.

A Self-Invested Personal Pension (SIPP) offers both flexibility and control, and is tax-efficient for most people. It’s a popular choice for anyone who changes jobs often, or who is self-employed.

Unlike traditional pensions, which generally only offer a limited number of investment options, with SIPPs you choose what to invest in and when. Choices include equities, bonds, funds, investment trusts and even property.

For both ISAs and pensions, you have the choice of investing for income or for growth. Each has their own merits, but if you do choose income, then any income from pensions will be automatically reinvested. We’ll look at this in more detail in one of our next articles.

6. Implement the plan

Now it’s time to actually invest – an IFA can help you make the right choices here. As well as making choices that match your risk profile, think about where you might invest and with who. For example, an established company with a good reputation and track record will be able to offer investments that range from cautious through to adventurous.

Some investments focus on certain sectors, such as property or technology. Others will vary by geography, or might specialise in other criteria, such as ethical investments, or in smaller companies. Some investments have much higher charges than others, so always check first.

For most people, making regular contributions is the way forward. Not only does it serve to build up your investment, it becomes part of your regular budgeting, which lowers the temptation of simply spending the money now.

That said, lump sum contributions are a good idea too. A large initial contribution helps to kickstart an investment, assuming you can afford it. You may also have an inheritance or other windfall – it’s usually better to invest it wisely straightaway rather than spend it piecemeal over time. Lump sum contributions are also a useful way of maximising allowances.

With a SIPP, you can make regular or lump sum contributions to suit your budget and your current circumstances, stopping and starting contributions whenever you want. You can also keep paying into a SIPP until you’re 75 if you choose to.

7. Monitor your plan

However and whenever you invest, the more you put in and the earlier you can put it in, the longer the time period it has to grow.

Most pension providers issue annual statements, along with projections of what you might get when you retire. Always keep track of your investments and ensure you are reaching your key goals. But do think in the long term and resist the urge to keep chopping and changing. In most cases, time in the market is better than timing the market (or rather trying to time it – even the savviest professionals frequently get it wrong).

Over time, of course, you may well want to transfer to a different fund. Your risk appetite may change, and as you get closer to retirement you’ll likely want to take fewer risks. Long-term market trends, changing tax and retirement legislation, your tax allowances, and your personal situation can all mean it’s a good idea to adjust how you invest. Before switching, though, remember to check if there any charges for switching, or any other hidden costs, and factor these into your calculations.

8. Planning for all circumstances

As always, expect the unexpected – or at least plan for it to a reasonable extent. Forced early retirement, health issues, family circumstances, having to care for others – all of these and more can mean you might have to reassess how you’re saving for retirement, as well as when you might actually retire.

Consider taking out insurance relevant to your circumstances. For example, life cover, plus maybe income protection.

You may also want to assist family members during your retirement. For example, with property prices so high, many people choose to help their children or grandchildren with buying a property.

Ensure you have an up-to-date will. This will make life easier for your loved ones if the worst does happen. It also allows you to leave bequests. If you have substantial assets, then inheritance tax will be an issue, but the more you plan your legacy and the sooner you do it, the less your beneficiaries are likely to have to pay.

Most pensions are exempt from inheritance tax. If you are able to pass on any remaining pension fund, you can’t do this via your will. Instead, you’ll need to arrange this with your pension provider by completing an ‘Expression of Wish’ form.

For more details on the steps you should take for smart retirement planning and investing, you can download our retirement guide. There’s lots more information on our dedicated retirement planning hub.

Smart retirement planning starts with you – and Janus Henderson.