It’s a simple question, with a complex answer.
You know you have to “do the maths”, but how? And what do you need to factor in so you can enjoy a worry-free retirement?
What will you do when you get there and what will it cost?
We all get the same amount to spend in retirement; 168 Hours a week. So first question; What are you going to do? Second question; How are you going to pay for it?
You need to work out the rough cost of your life. We have a form which you may find useful. Email us firstname.lastname@example.org and we’ll send you a copy. It helps you figure out what life costs now AND what you might spend in retirement. It includes expenses that are easily forgotten, e.g. birthday and Christmas gifts, car tax / servicing and holidays etc. It really is worth the time and may even give you a clearer picture of your current finances too.
Possibly the hardest assumption to make is around how long you will live in retirement. Scientists believe that the first person who will live to age 150 has already been born, but is that realistic for you? It’s one situation to be prudent to plan for the best-case scenario – one where you live to 100 say. That way, you should be well covered.
Already in retirement and have questions about your finances? Have a look at our case studies here, see Case Studies and/or contact us for an informal, free initial discussion, our contact details can be found here: Contact details
What is your number?
There is no exact science to calculate the precise amount you will need, but an understanding of your yearly expenditure and how long it may be needed is a good start. There’s inflation to take into account along with how much you have to start with. Everyone’s circumstances will be different – expensive lifestyle, big number; modest lifestyle, smaller number.
Your financial picture
It’s a question of looking at all your wealth and income now. e.g. from savings and investments, property, pensions (work based, private and state). If you don’t know what your government state pension will be, you can request a statement here: Statement request
It may be that you receive income already from bank interest, dividends, or property rental to fund what you spend when retired. If not though, you may have to spend your capital, especially if you stop working before your state pension age. This can have a hugely detrimental effect on your wealth if you’re invested in stock-markets that happen to be going down at the time you stop working.
If we take a couple, no mortgage or debts outstanding and assume they need an annual income of £30,000. Our estimate would be that they need to have a retirement “pot” of between £500,000 and £750,000 to not run out of money.
Why the range? It’s simply because amongst other variables, we don’t know for example how long they’ll live, future inflation rates and exactly what investment returns they will see during their retirement. Historically, there’s been a so called “safe withdrawal rate” of 4%. In other words, if you withdraw a maximum of 4% of your “pot” each year, your income is likely to be sustainable and you should not run out of money, even during a repeat of history’s worst market conditions.
There have, however, been more recent UK based studies which conclude that a safe withdrawal rate could be as low as 3.1%
So what is your number?
We regularly hear people say that retirement has crept up on them quickly. It really does pay to plan ahead. A little time taken now is one of the most important investments you can make in the most important thing of all…the rest of your life! It may be worth you doing the maths to come up with some realistic savings targets, and to review them. It won’t be correct to the penny, but it’s certainly a good start and much better than doing nothing.
The following case studies one our website, from actual clients just like you, may help to shed more light on some of the issues that can face you as you plan for retirement: Case Study 1, Case Study 2.
Not sure where to start?
If this article has helped you think, and you want to find your answers, you may benefit from talking to us. Since 2000, our team of Chartered Financial Planners and highly skilled support staff have been helping clients on the Isle of Man and in the UK to manage, protect and maximise their wealth with a range of specialist services which go beyond traditional IFA advice, and become more of a life partner, setting and achieving key financial goals and objectives.
Totally independent, we work for, and are paid by, you – with everything focused on helping you live the best life possible with the money you have, i.e. maximising and preserving your wealth for you and your family for generations to come.
Independent means independently owned – and all backed by the gold standard Chartered status. Indeed, Sharon, our founder, became the island’s first Chartered Financial Planner in 2009, and has recently enjoyed her term as the President of the Personal Finance Society, which is the UK’s largest professional body for regulated advisers with over 40,000 members.
Would you benefit from an initial, free meeting to discuss your financial questions or challenges? Click the link to our contact page for details: Contact Details
About the author
John Condon specialises in advising clients on all aspects of their retirement planning. He is a Chartered Financial Planner and Trust & Estate Practitioner at Thornton Chartered Financial Planners. Contact John direct here: John@thorntonfs.com