This content is for information purposes only. It should not be taken as financial advice or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult an independent financial adviser or financial planner such as ours here at Shorts in Sheffield and Chesterfield.
Age 40 is an important milestone. Many of us go through life believing that by 40, we will have achieved many of our life goals, whether these are related to career, business, or family. Most people hope to own a home by the time they are 40, and to have a clear path to financial independence.
But life doesn’t always work out that way, and we may find ourselves reaching that milestone with nothing but uncertainty about the future.
But for many people at age 40, the best years are still to come. You may have more working years ahead of you than behind you, so why not start to make some plans for the life you want?
What Do You Want to Achieve?
Your goals have probably changed since you were a 20-something just getting started in your career. At that time, the possibilities were limited only by your imagination.
Your older, wiser, 40-year old self is a bit more realistic. You have a greater understanding of how the world works and where your strengths and weaknesses lie. You might also have a family, or other responsibilities, which mean your priorities have changed.
This is an ideal time to make some plans for the future and think about what’s really important to you.
Take a moment to consider:
- Are you happy in your career? If not, what would you change?
- Where would you like to live?
- How would you help your family?
- How do you envision your ideal retirement? Is this a single event where you leave work for the last time and never look back? Or a more gradual transition?
- Which hobbies or travel destinations would you like to make more time for?
Your goals can be adapted over time, but it is only when you have an idea of the end point that you can work out where to start.
Today’s 40 year-olds carry a great deal of responsibility. An average person of this age may have the following to deal with:
- Young children, particularly as many people are leaving it later to have families. With children come childcare costs, school, and total responsibility for raising them to be well-adjusted adults.
- Elderly parents who require anything from occasional support to full-time residential care.
- Maintaining the mortgage on their ‘forever home.’
- Career progression and the possibility of attaining senior positions.
With all of these pressing concerns, it’s easy to see why planning for retirement can fall lower on the list of priorities.
These matters should all be dealt with before focusing on retirement:
- Mastering your budget and living within your means
- Building up savings of at least 3-6 months’ expenditure
- Insuring against risks such as death or illness
- Paying off expensive debt
At that point, planning for retirement should become a high priority. Of course, you will have other responsibilities, so the amount you have in your pension pot will always depend on how much you can afford to save. Getting into good habits now will make it easier to increase your contributions later.
Remember, you will receive tax relief on your contributions, which means that a pension contribution of £100 will only cost £80 from net income (£60 for a higher-rate taxpayer on contributions up to the level of income that is taxed at higher rate). Paying into your pension might have less of an impact on your lifestyle than you think. This is even more beneficial if your employer will match your contributions.
When Will You Retire?
The idea of retirement used to be simple. At age 60 or 65 you would leave the workplace, secure in the knowledge that you had a pension for life. Of course, this ended up being the reality for only a minority of people.
The State Pension age has risen from age 60 for women and 65 for men, to 66 for everyone. This is increasing further to age 67 and eventually, 68.
Private pensions are available at age 55 now, but this is rising to 57 from 2028. It will remain ten years under the State Pension age thereafter.
Additionally, fewer people have defined benefit pensions, and will be reliant on the funds that they have saved and invested.
The move away from a secure, fixed retirement has led to increased flexibility in what constitutes retirement. For example:
- It might be possible to retire incrementally, for example dropping a day a week over a period of five years.
- Business owners can gradually reduce their role in the company while continuing to draw some of the profits.
- Many retirees move to reduced responsibility or part-time work in a different field.
- Retirement can be the ideal time to start a small lifestyle business from a profitable hobby.
- You may be able to retire early if you have a substantial pension or other assets.
The amount in your pension should reflect not only the years until you plan to retire, but also how long it will need to support you for. If you can cover your essential expenditure for 5-10 years after your notional ‘retirement’ date, this vastly reduces the amount you will need.
Of course, if your plan is to retire at age 55 and never work again, you will need to save a lot more.
Income in Retirement
The amount of income you expect to receive in retirement is an important factor in establishing how much you should have in your pension.
The State Pension is the starting point for most people. While it won’t provide you with a dream lifestyle, it can probably cover some of the essential bills. To achieve the full State Pension, you need to pay National Insurance contributions, or receive credits, for 35 years.
Today’s 40 year-olds could have around 20 years of National Insurance contributions behind them, assuming they have been employed, self-employed, or claiming eligible benefits throughout this period. This will buy just over half of a full State Pension. You can check your entitlement to a State Pension at https://www.gov.uk/check-state-pension. If you have any gaps in your record, it may be possible to top this up by making voluntary contributions. The sooner you do this, the better.
State Pensions are one of the largest areas of benefit expenditure for the government. Particularly in times of austerity, we can start to wonder if any other adjustments will be made. Perhaps the pension age will rise further or the NI contribution level will increase. Or perhaps it will be abolished altogether. Historically governments have been reluctant to significantly reduce State Pension entitlement and any changes have come with several years’ warning. It’s probably wise to not rely too heavily on the State Pension and keep a close eye on any changes. You can then adjust your plans with plenty of notice.
As well as the State Pension, you could have:
- A defined benefit pension from an employer. This is becoming increasingly rare except for public sector workers.
- Property that could be let
- A business which will continue to pay dividends
All of these will factor into your retirement plan. The more income you can generate in retirement, the less reliant you are on the funds in your pension pot.
Consider Other Assets
Pensions are not the only option for funding your retirement, although they are generally the most tax-efficient.
Some other possibilities include:
- Investment Bonds
- Investment Accounts
- Venture Capital Trusts/Enterprise Investment Schemes
The best tax wrapper for your retirement plan will depend on several factors:
- Will you need to access the funds before your minimum pension age?
- Have you fully funded your pension? Overfunding can lead to tax penalties.
- Do you need to increase the amount you can withdraw tax-free?
- Do you have a high appetite for investment risk and the ability to sustain losses?
Clearly, if you have substantial amounts in other assets, you might not need to pay as much into your pension.
Your Investment Plan
As a pension is a long-term investment, you may be able to take more risk than you would with other assets. At age 40, you could have an investment horizon of 20 years or more. This is plenty of time to iron out any short-term market volatility and benefit from long-term growth.
A globally diverse, equity-based portfolio is probably the most appropriate option at age 40. The value will fluctuate daily, but the growth potential is high. The risk level (and growth potential) can be reduced as you approach retirement.
The rules for investing are well-established, and work as well for pensions as any other investment type:
1. Invest for the long-term
2. Stick with the strategy
3. Diversify your assets
4. Avoid being driven by emotions
5. Don’t try to time the market – it doesn’t work.
The amount you need to hold in your pension is interlinked with your investment plan. If your pension invests mainly in cash and fixed interest securities, you will probably need to save a lot more to achieve your goals than someone with a varied equity portfolio.
Equally, your investment strategy could depend on how much you can afford to save and what you would like to achieve.
A financial plan with a cashflow model can help you plan your retirement, based on what you have now and where you would like to be. This will establish how much you should have in your pension at 40, 50, 60 and beyond, giving you confidence that you have a lifetime of financial security ahead.
Please do not hesitate to contact a member of the team to find out more about retirement planning. Book a free call with a member of our team today, without obligation. We look forward to speaking with you.