Everyone has a love hate relationship with finances (be it personal finances or business finances). It is just too much to handle and most of which is complex and difficult to understand.
There are various websites that offer financial guidance and easy tip and tricks to manage finances so that you can stay on the right track. But most of the times, these guidelines and easy tips are not suitable to all people. Most of the information is sometimes inaccurate, outdated and outrageously wrong.
Following these guidelines not only dooms your financial goals that you are trying to achieve but all the built-up finances altogether. All this becomes even more difficult while planning a retirement.
There are certain rules that people usually follow. But can you blindly follow these rules? What happens if you ignore them?
In our article we have mentioned two retirement rules that you can upfront ignore and yet have a safe and secured retirement life. Following these rules are some alternative rules that you could use instead.
The two retirement rules that you can ignore are as follows:
1: Retire with £1 million to live comfortably in your golden years
Although £1 million makes a nice round number an individual can aim for and it sounds like a lot of money you can live on, but it £1 million really sufficient?
The answer is no. When this rule was actually made, £1 million indeed was a huge amount to live on. Depending on where you choose to live during your retirement age and what lifestyle you want to lead, having only £1 million may not ensure 20-30 years of comfort.
And even though £1 million is not a huge amount, it is still an unreachable amount for most people in the UK. Less than 5 per cent of the entire population has £1 million. For the remaining 95 per cent who does not have this kind of money, the total is so intimidating that it makes them give up on savings altogether.
The better rule: Plan on having 8x your final salary
Although this rule does not have any easy numbers to remember, but it is much better and more suitable for people as it includes personalised metric for determining what you would require for a safe and secured retirement lifestyle.
It is an achievable goal for any individual to save 8x of their salary. The main objective here is to replace 85 per cent of your final income in retirement. This way you will have one year’s salary saved by the age of 35, three year’s salary saved by the age of 45 and five year’s salary saved by the age of 55.
2: You will need to replace 80 per cent of your final income in retirement
This rule is not necessarily a bad rule or an outdated advice. But it is really difficult to correctly predict how much money you will require to continue your current lifestyle by the time you retire.
The amount is unpredictable because you are unsure about the events that would happen during your retirement. Whether you plan a travel or plan to build a farmhouse your grandchildren, you need money! Additionally, if your health deteriorates, you will need more retirement income compared to if you stay healthy.
The better rule: Decide what your retirement lifestyle will be
The main rule ignores the fact that there are several variables for every retiree, the cost of living to health requirements to luxury. So it is essential to take some time and properly plan your dream about what you would need to do in your retirement.
Once you are done planning your dream retirement, the next step is to determine the amount of money it will require to make it a reality. In case you require an additional amount, you can choose to reclaim PPI.
Since PPI has become one of the biggest scandals across the country, you might as well check whether any of your financial products had PPI policy sold alongside them. If you discover that you were indeed mis-sold PPI, then you can move on and make a claim.
The compensation amount then received could be used as an additional amount to your retirement plan.