4 Critical Pension Questions You Need to Consider
We all have dreams. Aim high. Reach for the stars.
And then we get older, wiser, and it all seems a little unrealistic.
We start to question how we’re going to provide for ourselves and our families in our twilight years. Will we have enough? What’s left when we retire?
What does it mean to be financially secure?
Those are the questions we’re going to answer, because even if you’re not hitting the golf course every day in your golden years, you still want to make sure you’re thinking about this stuff and planning accordingly. Here are 4 of the most important things you need to be asking yourself:
Question – How much money will I have to live on?
Start by calculating how much you’ll need in retirement and how much your pension will provide. One approach is to use the “rule of thumb” for retirement, which is 25 times your annual pre-retirement income. For example, if your annual pre-retirement income was $50,000, you’d need $1 million in retirement. Another way to calculate how much you’ll actually need is to calculate the income you’ll need for 30 years, and then divide that number by 30. Then multiply that number by 25, which gives you the amount of money you’ll need in a lump sum for those 30 years.
Have You Invested Your Pension Contributions in the Right Funds?
Pension providers normally present a list of different funds for you to choose from. In most cases, your provider will make the choice for you if you don’t decide where to invest. The problem with this approach is that your funds could be invested in your provider’s default fund rather than other funds that might be more appropriate for you. Most default funds often invest in riskier investments like shares and stocks for young contributors, and less-riskier investments like bonds for older contributors. However, that may not be suitable for you. You should check where your pension contributions are invested and review all the available options to see what options are appropriate for you based on your approach to risk and your financial goals.
Do you Qualify for Pension Freedoms?
It is important to find out what pension options are available to you once you attain retirement age. For instance, pension freedoms were introduced in 2015 by the UK government. It allows anyone aged 55 and above to access their contributions in whatever way they wish. Can you withdraw a portion of your contributions whenever you want and still continue investing the remaining portion? But if you have a pension fund from before when pension freedoms were enacted, you may fail to enjoy this flexibility.
What is the Cost of Fees and Charges?
A huge portion of your pension investment growth could be slashed significantly by the fees and charges you are paying. It is important to ensure you clearly understand precisely how much it costs to manage your pension. Reducing fees and charges even by a small amount can make a significant difference on what you end up with in retirement. For instance, profile pensions can reduce annual provider fees by up to 80%. This can increase the average pension by more than £10,000 over its lifetime.
Your pension is one of the most vital investments you will make in life. How it will perform can mean the difference between living from hand-to-mouth during retirement and enjoying a happy retirement.