It is important at every stage in your life to do a check on your financial position and know what your net worth is.
In simple terms, checking if your house has gone up or down in value is a good starting point and looking at your current and savings account balances is a quick win.
But as you get older, your finances become more complex. It isn’t as straight forward as one pension pot, one bank account and one mortgage. Often, the simple bank account you had when you first started out in the working world is now a joint current account. You may have one or more mortgages, savings accounts, credit cards and ISA’s.
Carrying out an assessment of your financial situation forces you to gather together all the information on your accounts and valuable assets in one place and keep track of your finances in their entirety. This will help you spot any imbalances and use as a measure to check that your financial plans for the future are on track. If you can keep track of your net wealth over time it will help you decide that is working for you and what isn’t, allowing you to make necessary adjustments.
Different generations need to look at this in different ways. For example, Millennials might spend most of their 20’s and even 30’s in negative wealth, when their debts outweigh what they have and own. They will be focused on how to get on the property ladder and what decisions to make regarding workplace pensions.
Generation X and Baby Boomers are more than likely to have built up a property wealth, and even inherited family heirlooms or bought a second home. A wealth check would help them to find out if they are managing their debts and assets efficiently or if investments could be better used elsewhere. S it comes closer to retirement for Generation X, it comes more important to review pensions and investments regularly. And for Baby Boomers who have already retired, they will want to be able to maintain their lifestyle in retirement and be thinking about reducing their inheritance tax bill.
Understanding your monetary position is crucial at any stage in life and will highlight where you can save more and spend less to reach your goals of financial freedom.
Here is what you should consider when you consider your wealth and financial freedom for retirement:
- Think about what your dreams and aspirations are, of things you wish to achieve in the coming years are and think about what your retirement might look like. Having a picture of this in your mind will help you to plan accordingly.
- List out your current liquid wealth, which might be made up of your Current Account, Savings, ISA’s, Deposits and anything else you can access easily.
- Then think about your other assets, which may include: home, buy to let properties, your pension, your business. These are generally not easily accessible but could be sold or if it is your pension, can be accessed from 55.
- List your current income, which will include your salary and may also include dividends or child benefits. These will at some point in your life stop and therefore no longer provide you with income, but need to be accounted for until then.
- Consider your future inflows for when you retire. These are likely to include your state pension and a private pension scheme. Make sure you gather all of your pension pot details, even those pots that you may have forgotten about. The Pension Advisory Service and the Pension Tracing Service can help you with this, if you are struggling to get access to these from a previous job.
- Calculate your current cost of living, which will include basic expenses such as housing, food, taxes, child care and health care. It is important to make this as accurate as possible and take note of additional money spent each month for leisure, as these are not simple direct debits that are clear on your account statements.
- Consider and allocate some budget for any large purchases you may make throughout your life. Examples of these could be a holiday home, a child’s wedding or an expensive car. You may not be aware of these yet, but it is always good to forward think and allocate some budget for them!
- Consider what your retirement cost of living might be – what will it cost you to do all of the things you want to do while you still have your wealth and health and can enjoy these precious years.
- Always have Inheritance Tax Planning in the back of your mind. Use an online calculator to check if you might be affected by it. Think about making gifts – they can reduce the size of your estate and your potential Inheritance Tax Bill.
- You should always consider making professional financial advice when planning life changing financial situations. Speak to a Wealth Management company such as ourselves to help you make decisions on your life now and in the future.