Wealth Check: 'When can I afford to retire comfortably?'

Christine Tucker, 59, an office accountant from Gravesend in Kent, would love to retire at 60, but knows that, based on her modest retirement savings, this is probably a pipe dream. "It would be wonderful, after 45 years of work, to please myself with my day," she says. "I have lived in my own home since I divorced 19 years ago. My partner and I live separately, there are three years to run on the mortgage, and I work full time. I know it won't be possible to retire at 60 because of my financial situation, but I want to know how and when I can give up work."

Case notes

Salary: Christine earns approximately £29,000 a year.
Monthly expenses: She pays around £560 in taxes and national insurance contributions.
Mortgage: Christine's mortgage has around three years left to run on a property worth around £275,000.
Savings: Aside from her pension, no additional savings or investments.
Pension: Christine contributes around £120/month to her occupational pension scheme and has a fund that will be worth around £57,000 by age 60.
Other debts: She has a credit card balance of around £3,000.

We asked three independent financial advisers to take a look at Christine's situation: Steve Laird of Carrington Wealth Management, Dennis Hall of Yellowtail Financial Planning, and Danny Cox of Hargreaves Lansdown...

Mortgage & spending

Because Christine is so close to retirement, the financial advisers believe she should look carefully at the retirement income she hopes for, taking into account the effect of inflation, and add as much extra cash as she can to her retirement savings pot. "Christine is currently spending around £1,700 a month, or £20,400 a year, on everyday living expenses," says Danny Cox. "That is higher than her estimated retirement income needs of £15,000 a year. This suggests her outgoings will fall – outgoings that currently include her mortgage payment.

"Christine needs to get as close to her required pension expenditure as she can, using any surplus income to repay her mortgage or credit card."

Pension

Because Christine is close to retirement, she needs to protect her pension pot from fluctuations in the value of her investments, because she doesn't have time to wait for them to recover. This means placing a greater proportion of her money in less volatile, safer vehicles, the advisers say. "She should be careful where her pension monies are invested," Cox says. "With three years to go before retirement she should be taking a conservative approach to her pension investments. I would focus on cash investments."

Work-life balance

Although Christine's hope is to retire completely and begin drawing down her pension, all three financial advisers suggested other options. "Christine knows that she can't afford to give up work completely at the age of 60, although she'd like to," Steve Laird says. "However, reducing her working hours would give her more time to do what she wants while maintaining her income.

"Assuming that she is able to persuade her employer to reduce her hours, she will, after allowing for the state pension, be a little better off. She will lose around £5,840 in pre-tax earnings and gain around £7,800 in pre-tax pension, a net after-tax benefit of some £130 per month.

"She should use this money to establish a rainy-day fund, ideally in a cash ISA, having made sure that she pays off her credit card debt before the interest-free period expires."

Waiting game

But if Christine can hold on for just a little longer, it could make a big difference to her retirement income. "Christine's current money purchase pensions could be worth £57,000 by age 60," says Cox. "That could provide a tax-free cash sum of £14,250 and a resulting pension of £1,780 per annum. This assumes 6 per cent annual growth between now and age 60 and an escalating annuity – which increases by 3 per cent a year to offset inflation.

"But if Christine can delay her retirement until she is 63, just three more years, and her contributions continue at the same level, the pensions could be worth nearly £78,000, providing a tax-free cash sum of £19,500 and a resulting retirement income of £2,600 a year.

"She can and should obtain an accurate forecast of her projected benefits from her two occupational pension schemes to find out exactly what the shortfall will be between the income she hopes for during retirement and the income that she will realistically receive."

Property

One of Christine's big payments is her mortgage, which still has three years to run, but it is also her biggest asset. "With so much wealth tied up in property, Christine should ask herself whether she really wants to be a homeowner at all," Dennis Hall says. "Too many older people are asset-rich and income-poor, and that is not a recipe for a happy retirement.

"Christine has many plans for retirement, but may lack the money to achieve them. Releasing money from her property while she is still physically and mentally able to enjoy her retirement makes sense," he adds. Downsizing may be a good choice for Christine, rather than a controversial approach like equity release, though he acknowledges that the property market is far from favourable right now. "But if Christine waits too long she may find she needs residential care. At that point, her local authority may use the value of her home to pay the bills."

For a free financial check-up, write to Wealth Check, The Independent, 191 Marsh Wall, London E14 9RS; or email cash@independent.co.uk