How to set retirement goals

The onus of providing for retirement is increasingly falling on individuals. Few will have the luxury of an employer-provided defined benefit pension plan promising a certain level of income, especially outside the public sector. Meanwhile, State Pension Age is creeping up and is set to reach 68 by 2046.

At the same time, better medical care and new drugs may extend life expectancy in the future. Your retirement may last half as long as your whole career, or longer, so it is important to think about your goals for this portion of your life and how you’ll fund them. So what are some good retirement goals to work towards?

How to set retirement goals

1. Work out your retirement spending

Common retirement goals almost always depend on setting your likely level of retirement spending at a given retirement age. Here it helps to divide between essentials and luxuries, to give yourself a spending ‘band’ that ranges from ‘minimum required’ to ‘ideal situation’.

Most people believe that after retirement their annual spending will amount to significantly less than their expenditure during their working life. It’s true that a number of costs are usually eliminated such as mortgage payments, providing for children and expenses associated with going to work. However, more free time often means more opportunities to spend money. The early years of retirement, when health is generally better, may be a chance to travel or tick things off the bucket list. Don’t forget there is also the possibility of unexpected medical expenses or other unplanned spending, so it’s best to build in a margin to allow for contingencies.

You could even mentally break up your retirement into several phases to better estimate how much you might require. Spending often starts off reasonably high in the more active early retirement years before falling away. It can then pick up again as medical and care needs increase.

Having realistic expectations about post-retirement spending habits will help you define the required size of your retirement savings and ensure you don’t outlast them. Longevity is, of course, a huge unknown. You can get a feel for it by using the Office of National Statistics life expectancy calculator. As well as telling you the average to be expected, it also shows the likelihood of reaching various ages.

Knowing how much you need each year, on average, and how long you might need that for, will help you calculate the size of the retirement pot you require, after allowing for other sources of retirement income such as State and defined benefit pensions or other assets such as property.

At this point, our pension contribution calculator can help you. Your current age, the existing resources you have built up and the remaining time you have to add to your retirement provision are the key variables it considers.

This may be a sobering exercise. The average pension pot at retirement (age 60-70) is £228,000 for men and £152,600 for women, levels of UK pension savings insufficient to meet a retirement living standard deemed ‘moderate’ by the Pensions and Lifetime Savings Association.

Read more: What is the average pension pot by age

Don’t forget to take account of inflation into account too. The pension calculator will make assumptions around this, but it could be more or less when it comes to real life. According to the Bank of England, £100 worth of goods and services 20 years ago costs £176 today.

2. Get an idea of when you'll retire using retirement planning tools

Once you have been through this exercise you will be able to better judge when you would like to or will be able to, retire. You’ll also be equipped to plan your strategy and how much money to save for retirement. The longer you have until retirement, the higher the level of risk that your pension savings can generally withstand.

If you’re young and have 30 or more years, you should generally have the majority of your assets in riskier investment strategies such as shares. Larger ups and downs in the value of your pot are inevitable, but over the longer term, you should be able to secure higher returns that more reliably outpace inflation – rises in the cost of living. What’s more, if you are adding to your retirement portfolio consistently over your working life, temporary market volatility along the way can actually work out to your advantage.

We should also note at this point that rules around pensions and retirement are not necessarily set in stone. State Pension Age could change for instance, and pensions are often a tempting target for governments to tamper with. For those with large pots, in the short term much will depend on Labour’s tax plans for pensions.

3. Explore tax relief opportunities

You should also bear in mind the considerable advantages offered by pension tax relief:

• 20% for a basic rate taxpayer
• Up to 40% for a higher rate taxpayer
• Up to 45% for an additional rate taxpayer

In this example of a higher rate taxpayer, a £1,000 contribution can cost just £600. To put it another way, that’s a 66.7% return on your money before you have even invested it.

Tax relief on pension contributions example:

A higher rate taxpayer pays £800 into their SIPP.

Paid into the SIPP:

SIPP contribution: £800

SIPP tax relief from HMRC, claimed by provider: £200

Total: £1,000

Cost to higher rate taxpayer:

Gross SIPP contribution: £1,000

SIPP tax relief from HMRC, claimed by provider: -£200

Higher rate tax relief reclaimed: -£200

Total: £600

When it comes to retirement planning, the pension has special ‘superpowers’ that other accounts can’t match – though benefits depend on individual circumstances and tax rules can change. It’s been estimated that nearly 50% of people aren’t aware of tax relief, so lots of people are potentially missing out

You should also start planning for retirement as soon as you can to take advantage of the power of compounding. You might not think that saving a few hundred pounds extra here and there in your 20s or 30s will mean much in the long run, but the power of compounding – getting returns on your returns over time – can ‘snowball’ that money over time if invested well.

You will also need to consider your tax position when you take income from your pension, which can be accessed from age 55 currently, though this age is set to move to 57 from April 2028. While you may have got tax relief on your contributions to your pension, the flipside is there is potentially tax to pay when you withdraw, albeit you can usually take up to 25% of a defined contribution pension such as a SIPP as a tax-free lump sum under current rules. The other good news is you can time when and how much money you take to suit your circumstances, so with a bit of planning you can minimise the tax burden.

Read more: What is pension tax relief?

Read more: How to claim higher-rate pension tax relief

4. Be flexible with retirement goals

Retirement goals evolve through the years. You may find you need to tweak things along the way to take account of how things are panning out or even make alternative retirement plans. Maybe you have more or less disposable income to fund pension contributions than you thought. Perhaps your investments are doing better or worse than anticipated. Do you need to move into part time work before you retire fully for instance?

In any plan, a lot of assumptions have to be made, and it is unlikely things will go exactly how they are modelled in advance. Yet having a goal in mind, and a roadmap to meet it will help keep you focused on it and better allow you to take corrective action where necessary.

5.Take financial advice when you need to

Retirement planning can be complex, but you don’t have to tackle this on your own. There are free resources such as the government’s Moneyhelper website, and we can help you create a financial plan for retirement with our expertise. It can help you:

• Figure out when you want to stop working and how much money you’ll need to support the lifestyle you want
• Take control of different pensions as well as any other long term savings and investments you may already have

• Create a savings and investment plan that makes the most of your tax-free allowances
• Make sure any existing plan is on track and think about the best ways to close any funding gap should one arise
  

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