Is there a ‘good time’ to retire?

Today we speak to Michael from our Financial Planning Team about whether there is a good time to retire. 

So Michael, is there actually a ‘good time’ to retire?

Ok, let’s look at it from a tax point of view.

So, if you’re a basic rate taxpayer, there isn’t really a ‘good time’ to retire because ultimately the chances are when you do you’re likely to still be a basic rate taxpayer. Therefore you’ll be paying the same rate of tax regardless.

For higher-rate taxpayers, you could argue the beginning of the tax year (April) is better because then they’ll come out with a higher tax band.

However, if they’ve saved up enough cash reserves and decided to retire part-way through the tax year they could use some of the tax reserves they have to see themselves through the remainder of the tax year.

And then from there, they could pay the basic rate tax in the new tax year. 

Really though the more important part is to have a strong plan in place.

This is what our whole financial planning process is all about.

Once we’ve worked with our clients to provide a clear, robust financial plan, then we’ll show them how best to achieve what they want to do in terms of retirement.

So, that’s factoring in holidays, time with the family, home renovations, you know all the things that are important to them.

As long as we’re aware of when it is that a client is looking to retire we can plan around it.

Therefore a good time to retire, for anyone, is when they want to retire.

It’s more about making sure they’re being open and honest with us, they are giving us a date of when they think they want to retire.

Then based on tax bandings, we’ll be able to work out how much they’ll have earned, and then over 6 months of the year will they have knocked into another tax band. 

If they don’t have enough money in between working times to then supplement their income at the start of the new tax year, then they can start accessing some of their pensions via drawdown or annuities.

Another option would be to release some tax-free cash to see them through that period of time.

So ultimately the plan is just about putting something in place so that one day they can retire. 

But for a basic rate taxpayer, it’s irrelevant what time of year they retire because chances are they were paying 20% tax as they were working, and then when they retire they’re still going to need to draw both their personal allowance meaning they will still pay 20% tax. 

Does the current situation with the financial markets have an impact on when you can retire?

No, it doesn’t.

It’s important to remember your funds will be invested for the long term to fund your retirement, so likely the next 20-30 years.

Over 20-30 years there are going be dips and the financial plans take into account this will happen. We call this stress testing the plan.

So we look at it from a probability of success.

If we were to see these big dips in the market, whether it’s a pandemic, a banking crash, or like in early 2000 when the .com bubble burst, our cashflow modelling runs through these scenarios to see if the plan would still work or not. 

Now, what history has shown us is that the markets have jumped back up.

What we don’t know is how quickly or when.

But what we do know is they will recover, as over the longer term the markets are very predictable.

The general trajectory is upwards.

Over the short term, there’s a lot of volatility. But as we start accessing pensions and funds, we’re only accessing a relatively small proportion of what’s actually invested. 

So a client may have a pot of £300,000 but they may only be drawing out £1,000 a month.

That’s a small fraction when the bulk of the funds remain invested. So when hopefully the growth comes back to the market the pot rebounds with that. 

The market should not have a detrimental impact on clients wanting to retire. 

It’s important for clients to stay calm during these periods and not to try and take out as much as they can.

Once you’ve taken cash out you have locked in that loss. The cash isn’t going to grow back at the same rate that the invested funds are.

So whilst I can see why clients would think that, it’s much more important to make sure we are aware of risks that come with taking cash out.

You should only take what you need when you need it. 

What about inflation, will high inflation impact plans?

The Government target for inflation is that it should run at 2%.

Historically inflation has been below that, but currently we are peaking up to 9-10%.

Predictions are that in the short term it will go up a little bit further, but the prediction is after that it may then ease away. 

So we are fully aware that inflation over the long term will go up and down, very similar to the markets.

We don’t anticipate inflation to be up at 10% for a long period of time.

If it does we will adapt our plans accordingly with that. If we look back through history to when mortgages were being paid off in the late 80s early 90s when inflation and interest rates were up at 9, 10, 12% and it didn’t last forever. We’re in a similar situation now.

Our stress tests take into consideration these issues and determine whether it’s really an issue or not.

Within our plans, we make sure to over-inflate certain lifestyle aspects such as holidays to allow for more reassurance. 

Thank you, Michael

Thank you Michael for taking the time to chat with us on this subject.