The last five years or so before retirement are some of the most important in your life. Your choices between spending and saving in those few years will determine the quality of your retirement. The wealth you have accumulated at the time of your last day of paid employment will determine your financial future for the rest of your life – which could be around thirty years.
In these last few years, it is really important to decide how you wish to spend your retirement and therefore how much money you will need. Then you will need to calculate how much you will need to save each year to reach your target level of retirement savings.
The transition from a high level of income to a low level of income after retirement is not an easy one. It is always a lot easier to find ways to spend extra money than it is to find ways to spend less! As you approach retirement, try and adjust your spending to fit what your retirement income will be. You will need to make allowances for any work-related spending, such as transport. The benefits of doing this are:
- You will be able to test how realistic your retirement budget is before you give up your job
- You will be able to adjust gradually over a period of time to your new income instead of going ‘cold turkey’ from a high level to a low level of income
- You will be able to save even more for your retirement.
Finally, check the balance between the value of your home and the value of your investment portfolio. If your house represents more than 70% of your total wealth, you may be in danger of being asset rich but cash poor in retirement.