Planning your retirement budget? 5 important questions to ask yourself

23 July 2024

Planning your retirement budget? 5 important questions to ask yourself

In September 2026, Nasa plans to launch Artemis III. Among the four-person crew will be Christina Koch and Victor Glover – the first woman and the first person of colour to land on the moon respectively.

The world will be watching as Koch, Glover and their fellow crew members Jeremy Hansen and Reid Wiseman blast off from Kennedy Space Center in Florida. However, for this brave band of astronauts, the trip back home will be just as momentous and potentially dangerous as the launch.

While it may seem unlikely, preparing for retirement is similar to a space mission. You expend lots of time and energy building up a strong pension pot. However, when you touchdown at retirement, you need to use your savings effectively to “return to Earth” safely, and call your mission a success.

Like rocketing back from the moon, it’s important to prepare properly and think about all the factors that could affect your retirement budget.

The good news is that planning for your retirement shouldn’t take quite as much work as prepping for a space flight – particularly with a financial planner by your side.

So, here are five important questions to consider as you prepare for a safe landing in retirement.

1. How will your spending change when you first retire?

When thinking ahead to your retirement finances, it’s important to build a picture of what your spending will look like. This could help you achieve your lifestyle goals and tick off your “bucket list” items in retirement.

Some costs like commuting expenses may fall. Conversely, if you’re spending more time at home your utility bills may increase.

Additionally, your lifestyle is likely to change and this too could alter your spending. You may start eating out more or going to the theatre more often, for example.

As a useful reference, Yahoo Finance reports that American retirees spend 81% of their income on:

Entertainment
Food
Healthcare
Transportation
Housing[1]

What you spend your money on will be unique to you. In the UK, thanks to the NHS, you may spend less on healthcare than an American would, for example.

Building a clear picture of how your outgoings might change when you retire can help you understand how much you may need to spend a year.

2. How will your spending evolve throughout your retirement?

You’ve read how your spending might change when you stop working, but it’s also important to consider how your expenditure could evolve as you progress through retirement.

It’s common for your financial needs to follow a “smile” shape in retirement.

Active years – When you first retire you may have lots of bucket-list wishes you want to tick off. This is common, with BlackRock reporting that 1 in 6 people plan to spend more when they retire and they’re still healthy – typically on travel[2]. As a result, expenditure in these first few years of retirement is often high.
Middle years – After making the most of your newfound freedom, you may find that both you and your spending slow down. You’ve likely completed most of your big retirement plans, and you may find yourself spending more time at home with family or working in the garden. As a result, your expenditure will probably fall.
Later years – As you age, you could require more support or healthcare. This could lead to higher living costs.

Considering how your needs may change throughout retirement, could help you better prepare your finances beforehand.

3. What large expenses are you likely to have?

It’s common to have big retirement plans. You may want to renovate your home or go on a dream round-the-world trip. Of course, these types of activities can cost a lot of money, so it’s important to carefully consider the best way to pay for them.

Pension Freedoms mean you can withdraw up to 25% of your pension as a tax-free lump sum. So, you may consider using this money for some of these one-off expenditures.

However, large expenditures could take a big chunk out of your retirement fund, so it’s important to consider your actions carefully and set aside funds for them if necessary.

4. How much tax will you pay on your retirement income?

Depending on how much you draw from your savings, you may have to pay some tax on your income each year. Indeed, FTAdviser reports that 8.51 million pensioners are paying Income Tax in the 2024/25 tax year[3].

When planning your retirement income, tax is a crucial consideration.

A financial planner can help you understand how to use all your assets to generate a tax-efficient and sustainable income, mitigating the amount of Income Tax you need to pay in retirement.

For example, in the UK you normally have a Personal Allowance, which allows you to earn £12,570 before paying Income Tax. You could also make the most of other tax allowances like the Dividend Allowance, or the Capital Gains Tax Annual Exempt Amount to limit your overall tax liability.

The order in which you deplete your assets could also be important.

Having an emergency fund to cover three to six months’ of normal expenses is usually a wise precaution. However, if you have excess cash, you may want to draw income from these reserves before accessing your pension investments.

Also, income taken from ISA accounts is tax-free, so you may consider taking income from any ISA investments you hold after using excess cash savings.

With the right approach, you can also use investments held in a General Investment Account (GIA) to generate a tax-efficient income. While this isn’t as straightforward as drawing on your ISAs, a financial planner can help by deploying the following strategies:

Moving your taxable investment accounts into ISAs
Making the most of your capital gains exempt amount
Structuring your investments according to the type of income they generate.

Pensions normally fall outside of your estate, so, by leaving money in your pension, you could pass more on to your loved ones tax-efficiently.

5. How much inheritance will you leave to your loved ones?

It’s important to prioritise yourself and your standard of living in retirement. However, you may also want to consider how much wealth you’d like to leave to your loved ones.

By acting in good time, you could reduce the size of your Inheritance Tax (IHT) liability, and maximise the amount you can pass on to your loved ones.

As mentioned above, holding wealth in your pension could allow you to pass on more money tax-efficiently. Another way to do this is through regular gifts – if you plan to make these, it’s important to factor them into your retirement budget.

With all this in mind, it could be helpful to determine how much you’d like to pass on so you can budget accordingly in advance.

Get in touch

At Titan Wealth Planning, we can help you prepare for your retirement so you can enjoy a stress-free and tax-efficient income.

Email info.wp@titanwh.com or call us on 0800 048 0150 to learn more.

Risk warnings

The information contained in this article is based on the opinion of Titan Wealth Planning and does not constitute financial advice or a recommendation for any investment or retirement strategy.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning or tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

[1] https://uk.finance.yahoo.com/news/retirees-spend-almost-income-5-100100037.html

[2] https://www.blackrock.com/us/individual/literature/whitepaper/spending-retirement-assets-final-whitepaper.pdf

[3] https://www.ftadviser.com/pensions/2024/06/27/nearly-9mn-pensioners-paying-income-tax-as-frozen-thresholds-bite/

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Disclaimer

Titan Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Titan Asset Management Limited is a wholly owned subsidiary of Titan Wealth Holdings Limited. This content is for financial intermediaries, it is not aimed at the general public. This document is published and provided for informational purposes only. The information contained within constitutes the author’s own opinions. Titan Asset Management Limited do not provide financial advice. None of the information contained in the document constitutes a recommendation that any particular investment strategy is suitable for any specific person. Source of data: Bloomberg, Titan Asset Management unless otherwise stated. Registered address: Titan Asset Management, 101 Wigmore Street, London, W1U 1QU.