Then, to see if you are living within your means you can also compare your income to your typical expenditure.
To manage your money effectively you may find it beneficial to use what we call the Three Pot Theory™. This approach – explained in detail here – can help you apportion your funds into short term, longer term and passion pots to accommodate every aspect of your finances. For now, and as your needs evolve.
Consider these challenges
Knowing where you stand financially can help you to plan ahead, but you must also allow for the inevitable challenges that come your way. Some of these factors are outside of your control.
As the graphic above illustrates, there are certain factors you can’t influence, but you can model for their effects as these helpful tools show you.
You could live much longer than you think, and therefore need more money than you think. For example, a woman who is 35 now has over a 20% chance of reaching 100 according to the ONS (Office for National Statistics), so you may need to prepare for this outcome.
Another challenge is the persistent effect of inflation, which reduces the real value of our savings – for instance, if your personal spending was £1,692 a month in 1997, you would need £2,933 to buy the same goods in 2017 (ONS calculations). Think how much your pension pot could be depleted in real terms in 20 years.
Finally, the long-term average return of investments is what matters, which is why it is so important to stay invested and not to try and time the market. As you can see below, small changes in the average return make a big difference over time.
Source: Netwealth, £500,000 invested in a Netwealth risk level 5 pension for 10 years then withdrawals of £2,000 gross per month inflated by 2% per annum for 30 years.
Explore your pension drawing options
You can choose how you would like to fund your retirement from two main options: an annuity or a flexible access drawdown. Both have benefits and points to consider, depending on your circumstances and preferences.
You should consider how long your pension pot could last and understand where the trade-offs are. For example, would you like to give up some potential income for more certainty by taking less investment risk or buying an annuity?
A comfortable future is greatly within your control
We have mentioned the factors which are typically outside of your control when investing, but paying attention to the factors you can influence could make a big difference to your investments and to the quality of your retirement – as we show in this article.
As the chart below shows there are four main elements that you can control that can significantly improve the chances of achieving your goals: staying invested, being diversified, using tax wrappers and allowances, and minimising fees.
This article is a summary of the helpful retirement insights we cover in detail in the ‘How much do I need to retire?’ webinar which you can view here.
Please remember that when investing your capital is at risk.