Are you planning to retire in Spain? If so, now is the time to review your finances to ensure you can afford your dream and that you’ll have enough capital to support you right through your retirement years.
Statistically, people can expect to live 20 years in retirement. That’s plenty of time to enjoy your retirement dreams. You’ve probably worked hard and saved money for many years and retirement is the time to start reaping the rewards – but you’ll need a careful plan to help ensure you don’t outlive your accumulated income. Without a salary coming in, your pension and savings will need to enable you to live comfortably in the manner you have chosen for the rest of your life.
Choosing your retirement lifestyle
Most people still need an estimated financial budget during retirement. Estimate your monthly expenses based on the lifestyle you plan to live. The rule of thumb for people wishing to continue living their pre-retirement lifestyle is to estimate at 80% of your current expenses. This is based on the fact that you’ll no longer have work related expenses such as commuting, lunches, dry cleaning, work clothes etc.
However many people actually spend more money in retirement than they do whilst working, for example, if they travel, play golf etc. On top of this a move to Spain will mean different and new expenses so it will be necessary to sit down, study the Spanish costs of living and work out a new budget. Allow for extra “hidden costs” associated with settling in over the first couple of years, and don’t forget to include medical insurance and a reserve for emergencies. Also, although on average a 65-year old retiree will live another 20 years, others live much more than this so take this possibility into account as well.
If you calculate that your money may not support the lifestyle you have chosen, you will need to make adjustments. You may wish to make adjustments in any case to improve your standard of living in Spain.
Re-examine your investment strategy
Whilst planning for retirement your strategy is likely to have been focused on long-term wealth accumulation. Now that you’re retiring, some of your goals will have changed. You’ll be withdrawing money from your retirement account, rather than just accumulating, so you may need to move some of your wealth into investments designed for short-term needs.
Having said this, many retirees make the mistake of abandoning their long-term strategy completely once they retire. Bearing in mind that you need to plan for 20+ years ahead, a long-term approach is still very relevant. To get the balance right, you need to sit down with a financial adviser, one familiar with both Spain and the UK, to examine your needs and current investment strategy and determine the best way forward for you.
Balancing your risk tolerance and future needs
Retirees often become risk averse. Without a steady employment income they worry that their nest egg could diminish unexpectedly. As a result they only seek out very low risk investments. The most common method is to simply leaving it as cash in a savings deposit account. Although this attitude is understandable, it’s often unwise.
Your goal during your retirement is to maintain your financial independence for your entire life time. This means that inflation is your enemy, and your investment strategy should be designed to at least outpace inflation, if not continue to build your nest egg. Inflation can easily erode the spending power of your capital, even if you are earning interest.
Another issue for expatriates to consider is the rate of exchange. If, for example, you keep your savings in a Sterling account and you only convert to Euros when you need them, the value of your capital will be affected by exchange rate movements. This could work in your favour, but it is likely to work against you and you won’t want to rely on luck.
Finally, interest and tax rates can change. Interest rates can fall dramatically so you should never rely on receiving a certain interest rate to earn enough money for retirement. Likewise, the tax rate you pay on the interest you earn could also increase, eroding your income.
We recommend holding a well diversified portfolio, possibly including equities, bonds, property and cash. This should be structured to your income and capital growth requirements.
Everyone has different needs and circumstances, so ask your financial adviser for advice on the right investment mix for you.
Nowadays there are quite a few choices on how to receive your pension. Depending on the type of pension and whether you have started drawing income, there may be ways to improve your pension fund and earn more from it. A pensions expert will be able to point you in the right direction. Remember that you will need to take the Spanish rules into consideration, as these are different, so it is essential to take advice from an adviser conversant with both UK and Spanish pension and tax rules.
Finally, you paid income tax when you earned your money in the first place, so paying tax again on interest and dividends can be very frustrating. One way to increase your income in retirement is through careful tax planning. Don’t even think about tax evasion – it’s illegal – but there are legitimate vehicles you can use to defer, reduce or avoid tax completely. The less tax you pay, the more you have to spend in retirement.
Retirement should be the time when you take it easy and reward yourself for all those years of hard work. You shouldn’t have to worry about money all the way through. The earlier you get your financial planning in order, the better. Then you can sit back and enjoy your new life in Spain.
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