How to create a retirement plan in 15 steps

You’d be surprised how many people don’t realise they can afford to retire (or are close to it) until they pull a plan together.

By the time you’ve sat down, got to grips with everything you have saved, and calculated how much you expect to need, you may well find you’re nearer than you think.

Even if you’re not, it’s still an important exercise and will prompt you to think about what actions will help you get to that retirement finish line faster.

Creating a retirement plan sounds like a huge, daunting task - but break it down into small chunks and you’ll find it is surprisingly manageable. You may even enjoy planning for travel, new experiences and other ways you’ll fill your time in retirement.

• Get updates on markets, ISA funds, pension saving and much more

Here we break down 15 key steps to build your retirement plan.

We’ve also created specific checklists to follow whether you’re 10, 5 or 2 years away from retirement:

• Retirement plan checklist: 10 years from retirement
• Retirement plan checklist: 5 years from retirement
• Retirement plan checklist: 2 years from retirement

1. Define what retirement looks like for you

When do you want to stop working? Will this be a hard stop or will you phase into retirement? How do you plan to spend your time after work: will you be volunteering, travelling the world, looking after grandchildren, or something else?

Before you work out how much you need, you’ll have to work out what kind of life you want post-work.

2. Figure out how much you have

Collect all the information you have on your pensions, investments and any other savings. For defined benefit (DB) pensions, find out when they will be paid, how much you’ll get and whether that will increase over time. Check if any of your pensions have special benefits, like protected pension age or enhanced tax-free cash.

Track down and consider consolidating your defined contribution (DC) pensions and non-pension investments. It can be easier to manage your investments if they’re all in one place, but make sure you’re not losing out on any of those special benefits by doing so.

• Find out more about transferring your pension to Fidelity’s SIPP

3. Check your State Pension forecast

For most people, the State Pension is the bedrock of their financial plans, especially because it is currently protected by the Triple Lock, meaning it rises by the highest of inflation, earnings growth or 2.5%.

You usually need 35 qualifying years of National Insurance (NI) contributions to get the full State Pension. You can check your record, how much you’re forecast to get and when you’ll receive it at Check your State Pension forecast - GOV.UK.

If you don’t have all 35 qualifying years, you can pay to make them up and complete your record.

If you took time out of work to care for children or relatives, you may be able to claim NI credits. In some cases, you can correct missing years or claim credits retrospectively - but backdating rules vary, so it’s better to review this sooner rather than later.

4. Calculate how much you’ll be spending

Now it’s time to create a full retirement budget. It’s best to do this in three buckets: essential, discretionary, and luxury.

Essential spending includes a basic food shop, energy bills, council tax, mortgage or rent (if applicable), and core transport costs among other things. 

Discretionary spending is important but could be cut back on if needed e.g. hobbies, meals out, gifts for family.

• Read: Income needed for a ‘comfortable’ retirement - the basics explained

Luxury spending is more aspirational and could be incorporated as and when money allows, for example, long-haul holidays, big home renovations, etc.

Make sure to factor in inflation: a £150 grocery shop will cost much more in 10 years’ time.

If you have a partner, how do you anticipate your spending would change (or not) if one of you passed away?

5. Plan for the unexpected

People often underestimate the cost or likelihood of later-life care, home repairs or adaptations, replacing cars and helping children or grandchildren. Local authority support for care is means-tested and thresholds are relatively low, meaning that most people pay their own fees.

• Read: 5 money mistakes people make in their 70s

It’s important to build in buffers to cope with unexpected spending.

6. Get a sense of how long your money needs to last

Use the ONS’ life expectancy calculator to find out, not just your average life expectancy, but also your chances of living much longer than that.

For example, a 60-year-old woman currently has an average life expectancy of 87. However, she also has a one in four chance of living to 95 and a one in 10 chance of living to 99.

Underestimating how long your money needs to last could mean you spend unsustainably in the early years.

• Read: The silent retirement risk we all ignore - and how to manage it

7. Decide how you want to access your money

Do you want to keep your money invested and access it flexibly via drawdown? Do you want to swap your pension pot for a guaranteed income by buying an annuity? Or do you want to do a blend of the two?

Everybody’s circumstances are unique and there is no one size fits all answer. But it is important to have a plan for which route you want to take because, as we’ll discuss later, that will impact your investment choices. 

Deciding how to access your money in retirement is a complex area so you could well benefit from speaking with a financial adviser.

The government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.

Fidelity's retirement specialists can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.

You should also think about whether you want to take tax-free cash from your pension. If so, think carefully about what you’re going to use that money for, so it doesn’t sit idle, potentially accruing tax.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. ISA eligibility and tax treatment depends on individual circumstances and tax rules may change. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of financial adviser or an authorised financial adviser of your choice.