When can you afford to retire? A case study on retirement planning

Understanding how financial planning for retirement planning in theory and graphs can feel both overwhelming and confusing. So, I invite you to review a real life scenario of Derek and Julie – a couple from Edinburgh with a common dilemma – ‘When can we afford to retire?’ Here, we provide a brief run through of how we help them.

The Problem(s): When can we afford to retire and how much can we spend?

• Both have had it ‘up to here’ with work and, now that their children are at university, their focus is shifting to their own retirement plans.
• Julie has a final salary pension from her time working at the bank, but it is an inflexible arrangement, and she is unsure whether to incur the early retirement reduction on drawing the income now (in her late 50s). There is also a confusing option relating to drawing tax-free cash.
• Derek has £700,000 spread across a variety of pension plans, from a number of roles he has had over the years. He is unsure how they operate, his options, the costs involved, or whether he is invested in the right funds.
• They want to travel abroad as much as possible in the earlier years of their retirement, and support their children until they are financially independent. But they do not know what they can afford to do.

The Process: what matters most

• We have in-depth discussions around their priorities and views. Every way they turn, there are opportunity costs and concerns, but we need to get to the bottom of what matters most, and to educate them as much as possible in terms of the options and risks.
• We look under the bonnet of all of their arrangements and determine the optimal approach for each in terms of charges, investment performance, taxation, risk, flexibility and structure.
• We model their scenarios, considering future cash flow and stress testing against historical adverse conditions (such as stock market downturns, periods of high inflation).

The Solution: clarity with confidence

• We ultimately consolidate some of Derek’s pension funds, using a flexible plan, so that they may help cover their expenses in the earlier years of retirement, whilst waiting for the secure income streams (State Pension and final salary scheme) to begin.
• We propose a reshaping of the investment portfolio within the pension to a more appropriate risk level.
• We propose that Derek, as a higher rate taxpayer, maximise his pension contributions in what could be his final year or two of employment.
• We quantify the expenditure that they could afford in retirement, considering how it will vary over the years, and stress test it so that they truly have confidence in the strategy. Only then, will they be able to truly enjoy their retirement.