Simple ways to ensure you don't have to work on after you hit 65
Drawn-out or top-up mortgages, children's college bills, and investment woes are forcing people to keep working into their retirement, writes Louise McBride
Many people now have to work after the age of 65 because they are still paying off mortgages, are footing the bill for children's college fees - or have other financial commitments following them into retirement. Others have seen their life savings or pensions wiped out during the recession - and so can't afford to retire at 65.
"People's investments may have been badly hit in the crash," said Derek Bell, chief operations officer of the Retirement Planning Council (RPC), when asked to cite the most common reasons people may have to work on. "Others may have remortgaged to get a deposit for a child's home."
The increase in the State retirement age is also forcing many people to work for longer. Today, you must be 66 to get the State pension - and that will increase to 67 from 2021 and 68 from 2028.
There are, of course, many people who don't wish to finish work at the age of 65 for personal, rather than financial, reasons. However, if you have no wish to continue working beyond the age of 65, it's important you take steps now to help you avoid having to do so.
One of the most common mistakes people make when planning for their retirement is underestimating the amount of time they will spend in retirement, according to Bell.
The average Irish person can now expect to live until the age of 81 - and so, assuming you retire at the age of 65, you can expect your retirement to last for at least 16 years. Of course, you could live much longer than this. Should you live into your 90s, for example, you will be at least 25 years in retirement. So should you be in your 30s or 40s and planning your pension, be aware that the money in your pension pot could have to last for 20 or more years. Ensure therefore to save enough into your pension from a young age. "You should be putting 20pc of your net income into your pension," said Bell. Starting to top up your pension when you're in your 30s or early 40s is a good idea.
Make right choices
Avoid making decisions which could force you to work beyond retirement. Limit the amount of debt you take on over your working life - and clear that debt as early as you can. Most banks offer mortgages which can be repaid up until the age of 70 - don't be tempted to take out such a mortgage because unless you clear it early, you'll need to work until you're 70 to pay your loan off. Instead, have your mortgage paid off by the age of 65. Topping up your mortgage can be a big mistake - particularly if you do so close to retirement. Resist the temptation or pressure to top up your mortgage so that you can give your child a deposit towards their first home.
Only top up your mortgage if you have a real financial need to do so and are sure you can clear it by the age of 65. Be aware that unforeseen circumstances, such as an illness or redundancy, could see you struggle to repay the loan.
Having children late in life is another reason people often have to work into retirement. Should you have children in your late 30s or early 40s, your children could still be in college when you retire. It could cost over €40,000 to send one child to college for four years. To avoid having to work into retirement to pay for college bills, start saving for your child's college education once they're born - or even before that. Otherwise, you may have to borrow to fund the cost of your child's college education and such loans could easily follow you into your late 60s.
Don't overstretch yourself financially when supporting your children - even if it is to help them get onto the housing ladder or to overcome a financial difficulty. Rather, encourage your children to be financially independent and responsible and to save for big-ticket items themselves - so that any support you provide doesn't put you under financial pressure in your retirement. Be careful about acting as guarantor for a mortgage as by doing so, you could be called on in retirement to repay your child's mortgage and ultimately you could lose your home if your child struggles to repay the loan.
Poor investment decisions or bad luck with investments could also see you worse off financially than you expected to be in retirement. So get independent financial advice if making any major investment decisions, don't fall for investment fads, and regularly review your investments and pension to ensure they're living up to your expectations. Be particularly careful about investing your money after you retire. Don't make hasty or ill-informed investment decisions - and don't put your money into high-risk investments. "When investing post-retirement, if it looks too good to be true, it probably is," said Paul Kenny, the former Pensions Ombudsman who is now a course leader with the RPC. "High potential rewards generally carry high risk."
Should you only have a year or two to go until retirement, there is very little you can do to undo the consequences of decisions you have made over your working life. Ultimately, most of the money in your pension pot will have been built up over your working life - however, topping up your pension contributions in the final years leading up to your retirement can boost your pension pot.
In the years leading up to your retirement, get independent financial advice on how to boost your tax-free pension lump sum. Saving extra money into your pension through Additional Voluntary Contributions (AVCs) could enhance your tax-free pension lump sum - though this will depend on your circumstances.
For those who don't have an adequate pension by the time they retire, downsizing to a smaller property could be their only way to raise the money they need for retirement.
Understand exactly what you're getting into though. It can be very stressful to move house in your elder years - house moves require a lot of energy and organisation. Should you be serious about downsizing, do so before or shortly after you retire as you are more likely to have the energy for it then. Make sure the area you're moving to has accessible and good public transport, a strong social network, and is close to friends and family. Otherwise you could become very isolated and lonely in retirement.
It's very important to have a financial plan for any money you raise from downsizing - and not to blow it all within a few years of retirement. Set aside a certain amount of disposable income to fund your lifestyle but address other financial priorities too - such as having adequate private health insurance, keeping enough money for nursing home care, and leaving an inheritance.
Remember, if downsizing isn't for you and you're cash-poor, you could raise some tax-free income in retirement by renting out a room in your home under the rent-a-room scheme.
To help make ends meet, it's important to plan your retirement spending carefully. "Retirement spending goes in three phrases," said Bell. "When people first leave work, they often spend a lot on 'miscellaneous' purchases such as trips abroad, or things which they hadn't bought before. They allow money to leak away. People should budget for, and control, miscellaneous spending, without being too frugal."
In the second phrase of retirement spending, spending tends to plateau - because it is at this stage that people age and typically stop travelling abroad, according to Bell.
"In the third phrase, spending goes up again as people often have to pay for care," said Bell. "So plan your spending carefully. Enjoy your money though - there's no point leaving a lot of it behind you."
Sunday Indo Business