HOW TO RETIRE AT 60

Investment & Wealth Advice


So, you want to retire at 60?

If you want to down tools on your 60th birthday, then it will require careful preparation to ensure that you have enough money to sustain yourself comfortably during your retirement. A core way to ensure a successful retirement is to create both a cashflow and tax plan.

This was the topic of discussion at our recent webinar. Ollie Barnett, Associate Director, introduced the subject and the speakers: Nathan Valbonesi, senior financial planner, and Clare Munro, senior tax adviser.

The session began with four questions for the viewers:

1.     How much do you think you need to retire?
2.     At what age do you plan to retire?
3.     Have you already included tax planning in your retirement strategy?
4.     How much capital do you think you would need to retire on £100,000 per year?

These are just some of the questions that individuals need to answer if they want to meet their retirement goals, but as Nathan pointed out, it boils down to “two really big questions: how much do I need and how long will it last?”

If you missed our first event, please join our next webinar, "How to retire successfully" on 20th August 2020 at 6pm.

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The two biggest questions

These are not easy to answer definitively, but the overall aim is to “establish a framework to arrive at a considered and sustainable plan that meets our client’s goals yet is flexible enough to cope with changes in circumstances”.

So, where do you begin?

“We can think of the pattern of cash flows in terms of two phases,” noted Nathan. There’s the accumulation phase, where you are earning a living and putting money away regularly, or building a business for sale. And then there’s the utilisation phase, where you are using the wealth you have already accumulated to finance your retirement, and perhaps to leave a legacy for heirs.

Retirement planning framework

Nathan laid out Weatherbys’ retirement planning framework. The aim during the accumulation phase, is to build a “core wealth pot”. This is a ring-fenced pot which is designed to “ensure you will have sufficient money to live on during later life”.

It consists of three elements:

1.     An emergency fund of three to six months’ spending in cash.
2.     Money put aside in zero-risk assets such as premium bonds, for medium-term goals and requirements up to five years hence (school fees, for example).
3.     Finally, a pot of investable assets “sufficient to look after you and your partner to age 100”. The aim is to invest this “with the lowest possible cost and risk and with the highest probability of success in achieving that retirement funding goal”.

Once you know that you have your core wealth pot in place, you can consider using any surplus funds for helping out the next generation, as well as for funding riskier “passion projects” or even starting up a new business.

The importance of cash flow planning

The key question, of course, is how much money needs to be in the core wealth pot? This is where cash flow modelling comes in, said Nathan. This involves considering all the variables that will impact the investment pot over time – including age, health, tax wrappers and allowances, investment fees, inflation – to build a graph showing how various pots “will behave over time through to age 100”.

The portfolio is also stress-tested under various market scenarios – including a major market crash in year one, which would have much more impact than one towards the end of retirement – to calculate the probability of the funds lasting through to age 100. “Usually we would like to get that percentage into the 80s and 90s”, said Nathan.

The point is not to be prescriptive, noted Nathan. “What this allows us to do is to have a really good in-depth conversation with our clients to establish whether the allocated amounts are enough”. Some may have to adjust their spending plans. Others may realise that they have been overly cautious. The other key is to review regularly, in order to react to changes as they occur.

Tax – one big cost to watch

One specific variable that more of us should pay attention to in retirement planning is tax. Clare Munro, senior tax adviser at Weatherbys, was on hand to explain why. “People avoid thinking about tax because it’s complicated.” But taking simple steps can result in huge savings.

“There are no tax schemes or magical structures,” as Clare put it. But with a bit of advance thought, “it’s possible to build a retirement cash flow which uses lower rates and allowances in the way government intended in order to build a low tax cost retirement funding strategy”.

Pensions and Individual Savings Accounts (ISAs) are a good place to start. Tax relief on pensions is given for contributions at the highest marginal rate of income tax (which can rise to above 60% at certain pinch points, such as the £100,000 to £125,000 income band), so they represent “the basic building block for retirement”.

While ISAs don’t benefit from tax relief on the way in, any income drawn from them will always be tax free. So where possible, individuals should maximise their annual contributions to both – “these opportunities are lost if not captured during the relevant tax year.”

Taking control of your retirement income

There are other options for those who have exhausted the contribution limits on ISAs and pensions, such as investment bonds. These enable tax to be deferred – money can be saved offshore during the high-earning accumulation phase, then taken out during utilisation and thus taxed when income is likely to be lower.

This leads on to the idea of structuring your retirement income in a tax-efficient manner. During the utilisation phase, you may well have more control over your income than during your working life. This is key, “as using income from different investment pots gives access to different tax rates.”

For example, you can withdraw 25% of a pension pot tax free – but it doesn’t have to be taken as a single lump sum. Any income drawn from ISAs is always tax free. Combine this with dividend and savings allowances, plus the annual income tax allowance, and “it’s possible to use a diverse range of investments and keep within the basic rate of tax.”

Tax – one big cost to watch

One specific variable that more of us should pay attention to in retirement planning is tax. Clare Munro, senior tax adviser at Weatherbys, was on hand to explain why. “People avoid thinking about tax because it’s complicated.” But taking simple steps can result in huge savings.

“There are no tax schemes or magical structures,” as Clare put it. But with a bit of advance thought, “it’s possible to build a retirement cash flow which uses lower rates and allowances in the way government intended in order to build a low tax cost retirement funding strategy”.

Pensions and Individual Savings Accounts (ISAs) are a good place to start. Tax relief on pensions is given for contributions at the highest marginal rate of income tax (which can rise to above 60% at certain pinch points, such as the £100,000 to £125,000 income band), so they represent “the basic building block for retirement”.

While ISAs don’t benefit from tax relief on the way in, any income drawn from them will always be tax free. So where possible, individuals should maximise their annual contributions to both – “these opportunities are lost if not captured during the relevant tax year.”

What should you do next?

As Clare concluded, “planning for retirement is a long game and of course one can’t predict what tax changes will happen over many decades. But we can say that if you retire with a diverse group of investment pots then you stand the best chance of getting and keeping tax efficiency during retirement.”

And how much did it take to retire at 60, on £100,000 a year? In this case study at least, noted Nathan, the answer was “around £4.1 million”.

Make sure you don’t miss the next Weatherbys webinar, “How to retire successfully” on 20th August at 6pm.

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Cash Flow Planning

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When it comes to planning for the future, most people tend to focus on one thing: building as much wealth as they can. This is vital, of course. If you want to meet your financial goals, then saving and investing wisely is absolutely fundamental.

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Important information

The information contained in this article does not constitute financial advice or a personal recommendation.  Past performance is not a guide to future performance. The value of an investment and its income can both increase and decrease and you may not get back the full amount originally invested. The value of overseas investments will be influenced by the rate of exchange. Tax rules can change and will vary depending on your individual circumstances.