Life accelerates as the years pass – it’s no joke. Hit 50 and whoosh, 60 is knocking on the door! Before you know it you will be knocking on retirements’ door – well, it certainly can feel that way!
Or, maybe it’s some pseudo-scientific concept based on the inescapable fact that the number of days we have left shrinks, therefore each day counts for a bigger percentage of the remainder – Cheery eh?
The point is:
“Look out! Retirement’s coming, probably faster than you’re expecting!”
So what should you do? What should you have done already to prepare for retirement? And, what are the traps to avoid along the way?
Let’s look at this from the eyes of a young doctor..
You are in your 20’s
You qualify as a medic, you work and you start paying your student loans. You join the NHS Pension Scheme – yes, you do! Unless you have a very, very good reason not to? Even with its later retirement age and increased costs, it is still a defined benefit scheme with an index-linked pension most people envy.
If you’re a hospital doctor you get shunted around from pillar to post. Should you buy a house? Yes probably. Even if you have to let it when house jobs move you to the far end of your deanery for 6 months – or longer.
You’re now in your 30’s
You’re busy working to pay your mortgage – and your student loans of course!
Children seem to be filling your house with things you can step on or trip over. You might like to save but you probably don’t have a lot of spare cash.
You may not think too much about it, but you’re at your most vulnerable. You need life insurance and income protection. Perhaps critical illness cover too.
The NHS sick pay isn’t that great and in your thirties, any long term ill-health pension won’t keep the freezer full, let alone pay school fees and a mortgage.
Are you still going out on that road-bike? Yep – insurance it is then! If you weren’t already an early starter this is the decade where you ramp up your protection cover.
You’ve already reached your 40’s
You’re paying your mortgage – and possibly school fees. Once we might have suggested saving into a personal pension to achieve additional tax relief and provide greater flexibility around retirement (do you really want to wait until you’re 68?!). That course of action is far less straightforward due to the lifetime allowance and the annual allowance. These both limit the possibility of accruing additional pension funds.
Of course, if you’re not in the NHS pension scheme (NB see ‘twenties’ above!), or if perhaps you’re a dentist with the majority of your income coming privately then, yes, personal pensions should be high on your agenda.
However, if you’re a high earner your ability to invest this way may still be limited by the annual allowance due to the ‘tapering’ rules.
How do you save additional funds for retirement?
This is particularly important if you don’t fancy having to wait until you are aged 68 before you can retire…
We use a range of investments to help you build a diversified portfolio using your ISA allowances and, for example, the often-overlooked annual capital gains tax allowance.
There are also VCTs (venture capital trusts) that attract 30% tax relief and these are a really viable alternative to personal pensions for the right investor. I must point out these are generally only suitable for experienced investors who are happy to accept the fact that their capital is at risk. They aren’t right for everyone, so you must take specialist advice before investing.
At this point in your life, you’ll probably try and overpay your mortgage, and this is a good, low-risk strategy – although it can be argued that all you’re saving is the low rate of interest you pay on the mortgage. Maybe that’s 2%? Could you get a better return by investing?
Equity-linked funds have historically always beaten cash rates over time – but you are trading certainty of debt repayment for investment risk – so you need to be sure that’s right for you. Obviously I will remind you that your investment capital is at risk and units can go down as well as up!
Wow you’ve made it to your 50’s
Whoa! It’s starting to get closer now…. Well, it is if you’re in the 1995 NHS pension scheme, not so much if you’re in the 2008 and 2015 NHS pension scheme…
Hopefully, the mortgage is manageable but you may be into university costs by now.
By the way, I should have said in your thirties and forties try and spend a little on some fun weekends away with your partner, ideally without the kids. Maybe lose that road-bike and buy a tandem? Whatever. Staying in love with each other could be the best investment you make!
It’s now time to really plan ahead properly (if you haven’t already done so)
Work out when the children will finish university or at least find gainful employment rather than yet another degree course! It’s usually in their fifties that most clients can finally invest some decent cash.
Check your benefits with the state pension – especially check your spouse’s eligibility. Doubtless, it will one day get means tested, but for now, you might as well maximise your entitlement.
Have another look at those protection policies. The ones you started in your twenties and thirties. Some of them may be ending now and others may no longer be appropriate.
Critical illness plans start to look a lot more interesting and useful than income protection policies now. And I speak from experience…
You’ll need to keep a keen eye on the value of your NHS pension pot in relation to the lifetime allowance – it’s usually in your fifties that you start to get close to the maximum. Just because you breach it, doesn’t automatically mean you should stop paying into the pension scheme – ongoing membership may well still be very worthwhile. It’s a complex matter and you should be seeking financial advice regularly during this run-up to retirement.
Finally, the finishing line is close – or is it?
In the countdown to retirement, you need to think carefully about how you want things to evolve. Do you want to just stop work altogether? Perhaps you fancy downing scalpel, stethoscope, dental drill, and sailing off around the world?
However, in my experience, most clients seem to want to wind down rather than stop, and there is some evidence that keeping partially occupied at first is better for your health than just stopping.
If you’re in practice either as a doctor or a dentist you may be thinking about selling your practice/share which can take time – so all the more reason to plan early!
Good luck, good health and good advice will help to ensure that retirement is the light at the end of the tunnel and not an oncoming train!
Have you already started planning financially for your retirement? What have you put in place? Let us know by adding a comment below.