From living longer to cruises of a lifetime – here are a few things you need to consider when saving for your retirement.
There’s no one easy way to calculate how much you’ll need to get by in retirement, as everyone has different goals and aims for how they want to enjoy it. However, there are some general pointers that can help you get a grasp of what you need, and what you need to be saving and investing to achieve it. When planning for your retirement, thinking about how much income you’d like on a monthly basis is a great starting point.
A rough guide to help could be assessing what you spend monthly now, and then taking away bills which will not be there in future (your mortgage, for example, which has a fixed end date). Doing this can help you get a clearer picture of what it costs just to maintain the lifestyle you currently have.
A common ‘rule of thumb’ in this regard is replacing about 70% of your salary on an annual basis. This is predicated on the idea that you will have paid off the mortgage, so won’t have that to pay off each month. Think then in terms of percentage income. A £200,000 pension pot that pays 3% per year will pay out £6,000. You might be able to attain more income for that size of pot, but it will involve more risk.
It’s also important to think about whether you want work to be a hard stop, or you plan on transitioning over time out of full employment. This can be a good option if your pension pot doesn’t extend as far as you may like yet, and the state pension is a way off from kicking in.
Keeping the state pension in mind is also important. While it may not seem like enormous sums of money, it does form a key part of many people’s retirement plans. The age of the state pension is creeping up slowly, which needs to be kept in mind when planning.
Perhaps the best answer to “how much should I save?’ is “as much as you can”, but there are some other factors to consider.
Think of the ‘U’
Saving for retirement is about goals. What do you want, and how long do you expect to want it for? As retirement unfolds everyone has a different idea of what they’ll want to do with that time and money.
On average though people’s expenditure tends to follow a ‘U’ shape. That is – when they first retire spending is high because they reap the benefits with tax-free lump sums and access to cash – taking nice holidays or maybe finally putting that extension they always wanted on the house. As they settle into a more normal routine over time though, costs start to diminish (the bottom of the U).
Finally, as people enter their later years, costs tend to rise again. This can be from more banal things like getting help in the garden or around the house, to more significant events such as health issues or care requirements.
Lamborghini or Laburnum?
Thinking about your needs in retirement can be framed principally through the kind of lifestyle you intend to lead. The income needs of someone who plans to be at home with grandkids tending to a garden will be very different from someone who intends to jump on cruises and see the world, or buy a fast car. Both choices are fine ones to make, but the former will likely be more frugal than the latter. That being said, if you’re planning to spend time at home, you will likely have to think more about the cost of living there, maintenance and even whether you’ve got equity locked up inside the property.
Live long and prosper
The other big thing to think about is longevity. Not only do you need to be able to replicate a portion of your income via a pension and other wealth on day one of retirement – it needs to be able to last for a long time. While predicting your own lifespan is impossible, there is a guide to keep in mind from the Office of National Statistics (ONS). At the moment a man aged 55 has a life expectancy in the UK of 84 years according to the ONS. This rises to 87 for a woman. While these are only averages, this is a significant period of time by any measure. While taking an income from wealth is perfectly possible, the more you save early on, the more time it has to grow and the better your outcomes will be overall.
For those that don’t have as much saved at retirement as they would have liked, it means either adjusting their lifestyle accordingly, or taking more risk with their pensions (something which brings its own challenges). The good news is, a lot of this can be addressed right now. Saving regularly and investing that money to an appropriate level of risk for you, at all stages of your adult life, is crucial. Retirement planning needs to be done as soon as reasonably practicable, because the earlier you start investing in a pension, the more it will be worth.
Your adviser can help you consider these plans more carefully. Don’t hesitate to get in touch.