This all depends on your planned lifestyle in retirement. Pension & Lifetime Savings Association (PLSA) research show us that the average couple wanting a ‘moderate’ lifestyle will need £43,100 per year in retirement but if you are reading this blog post you are probably not average.
If you know your likely retirement spending, then you are at least halfway to understanding how much capital you will need.
If you are struggling to start with this assessment, then start with your current annual expenditure and then deduct anything that you don’t expect to be paying in retirement. This might be mortgage payments, savings, children etc. There probably aren’t many items to be added in, that you aren’t currently spending but if you will have more time on your hands, holidays and travel might need to be added back in. Crucially if you have a company provided car, make sure to add in the running cost of a car and the cost of regular replacements.
Some people are aware of the ‘4% rule’, recently upgraded to 5% by the author. This states that the money you need for retirement will be your expenditure (less any net income you will have in retirement such as the state pension) divided by 4%. This will give you a lump sum amount, from which you can draw 4% per annum to pay for everything.
The problem with this formula (apart from it being based on the US investor) is that it aims to maintain the value of your money and is therefore far too conservative a withdrawal rate for many people. There is nothing wrong with eroding your capital in retirement by drawing and spending your money. Maintaining your capital in retirement is only good for the tax man.
If you are worried about leaving a legacy for the next generation, either give it to them during your retirement or transfer it into a trust for them to receive later on.
We see many clients underspending in retirement, either because they have accrued more than they need or because they are holding back, worried about the cost of care in later retirement.
There used to be talk of a U-shaped expenditure in retirement, otherwise known as go-go, slow-go and no-go. This assumes that you spend more in the first decade travelling whilst you have your health, then expenditure slows down as you slow down for a decade. Finally, costs increase again as the third decade of retirement requires high spending on health.
This has only ever been shown to be the case for American retirees, who suffer financially in later life as they pay more than we do for healthcare.
In the UK, only a quarter of people at retirement age will ever need any form of care during the rest of their life. Even those that do can often use the value in their homes via equity release to pay for it and therefore shouldn’t use this as a reason not to spend down their capital.
Whatever your circumstances the best way to plan your money in retirement is with cashflow planning software. Not the ones that will give you a single projected outcome but one like Timeline that will give you multiple outcomes so that you can see a range of possibilities. The most powerful planning is the cashflow plan that is returned to regularly to see how expenditure needs to be tweaked to make sure the plan stays on track.
At Altor we are currently guiding multiple people along their retirement journey and have seen most people make the most of the time and money they have. We do this from our office in Hook, Hampshire and throughout the UK using the latest technology.