How much money do I need for retirement?
In my line of work “do I have enough, Gareth?” is a question I get asked on a regular basis when discussing people’s retirement.
You’d be forgiven for thinking I’d have a simple, to-the-point, answer – this would be quite a short article if I did! But the reality is this figure is very different for every person. You need a lot less if you plan to spend your retirement holidaying at the Great British seaside, than you do if you plan to spend it jet setting around the globe. So, how much is enough?
Let’s start with how much you might spend in retirement
When trying to calculate your spending in retirement, many advisers will tell you about the ‘retirement spending smile’ and open your mind to the possibility of travelling the world and taking up new hobbies or saving money by no longer commuting once you stop working. I find this tends to be a little too vague or simply too far off to be useful. So, let’s keep it simple – you’re very unlikely to accept a lower standard of living in your golden years of retirement than you do now, so we’ll start with how much you spend today.
This can often be harder than you think to calculate. So, again, let’s simplify the calculation: take your gross salary(ies), take off some for tax, take off how much you pay on your mortgage (lets assume that will be paid off), minus any money spent on children (school fees, rent or just filling the fridge), then finally take away anything you save on a monthly or annual basis.
To misquote Commander Spock, once all this has been eliminated, whatever remains, however improbable, must be what you spend.
Now you know what you spend, how much will you need to save for retirement?
My rule of thumb (this is just a rule of thumb, and should not constitute formal retirement planning advice), is that to generate £40,000 per year for you, I need an investable portfolio of about £1,000,000. The broad maths here are a portfolio return of around 5% for a ‘balanced’ risk portfolio over the long term, verses an income requirement of 4% plus a bit for inflation. On this basis, we reduce the value of the portfolio by something like 2% per year and it will therefore last about 50 years before running out.
Given most people retire after age 55, this should be enough to last the rest of their life, particularly if they decide to retire at 60. This is great if they don’t have children or aren’t concerned about passing on wealth. Not so great if you have children or are concerned at all with passing on wealth, or just don’t like the idea of a strategy based on watching your portfolio reduce to nothing as you enter your twilight years. Should either of these things apply to you, then you’ll likely need considerably more. It’s also crucial to remind ourselves that this is all in today’s money and assumes you retire tomorrow, if you don’t plan to retire for 10 years, then you’ll need to up the expenditure figure by inflation.
Now, you know what you’ve got, and you know what you’re spending currently. You’re either suitably smug, suitably terrified or somewhere in the middle. But, not so fast!
Don’t forget: state pensions will (probably) provide an income, you may be more or less willing to take risk with your portfolio than in my example, you may plan to retire sooner or later than 55, an inheritance to come or gifts you want to give, and products like equity release can be used to effectively increase the size of the ‘investable assets’ pot in later life. So, even the relatively simple calculation I’ve outlined above still has a number of variables that might confuse it.
What can you do for definite to help you save for retirement?
The most important thing is to begin thinking about this and asking the questions. The best time to do this was always yesterday, but failing that, today is a close second. The earlier you do it also gives you maximum time to take advantage of tax allowances, employer contributions and the power of investment return compounding.
At 7IM, we have some sophisticated software that allows us to model many of these variables over the course of a lifetime, road test some assumptions and show you whether you might have a shortfall or excess later in life, which many of my clients find incredibly useful.
Should this or anything in the above strike a chord or whet your appetite to find out more, then please don’t hesitate to get in touch.
It’s important to note that the value of your investments may go up and down and you may receive back less than you invested originally, and the above comments are intended for information purposes only and do not constitute financial advice.