One of the most common questions we hear when people embark on their retirement planning is “how much money will I need to retire?”. This is the million-dollar question, and frustratingly the answer is, “it depends”.
No two people are the same, and therefore no two retirement plans are either. Additionally, retirement planning goes beyond simply ensuring you don’t run out of money – it’s about lifestyle preservation, tax efficiency, and maintaining long-term financial control.
Whether your wealth is tied up in investment portfolios (which can include ISAs, GIAs, offshore bonds, etc.), business interests, property, or any combination of approaches, it’s crucial to ensure that your retirement planning aligns with your lifestyle ambitions and legacy objectives.
Here are a few considerations that could help you begin to map out your monetary needs in your retirement.
Retirement comes in three phases
At Tideway, we tend to talk about retirement in three key phases:
- The Active Years. These are the early years of retirement, where you’re likely to have more time, energy, and good health on your side. This is the part of retirement where your living costs are likely to go up in order to fund your new leisurely pace of life.
- The Passive Years. This phase begins as you start to move into older age. Your ability and desire to do new things like travel or engage with extraneous hobbies tapers off and you may find that you settle into a quieter pace of life.
- The Later Years. As morose as it may seem, it’s an unavoidable fact that retirement culminates in the end of our lives. In the last few years, your lifestyle spending is likely to become quite low indeed, but other areas such as medical care or nursing home costs can become quite expensive if they’re required.
Understanding the different phases of retirement is the first step towards understanding how your income needs are likely to vary as you move through your life.
It’s unlikely that you’ll need the same level of income every year for the rest of your life – much more likely is beginning on £65k, for example, and gradually tapering the figure down as you move through the three phases. The exact figures will, of course, depend on your individual circumstances and needs.
Due to the flexibility needed to tailor your income using this approach, we favour a pension drawdown approach and aren’t particularly big fans of using the annuity approach. Our founder, James Baxter, recently wrote a paper titled ‘Why I’ll Never (Personally) Buy an Annuity’, which you can read here if you are interested.
How can I work out a rough ballpark?
According to the Pensions and Lifetime Savings Association couples living in the UK will need:
- £22,400 per year for a minimum retirement (roughly equal to two state pensions);
- £43,100 per year for a moderate retirement;
- £59,000 per year for a comfortable retirement.
Of course, your individual figure will be different, but this is a helpful starting point.
Whilst your lifestyle spending will change over time, you’ll always have a baseline need of living expenses and essential expenses to keep yourself housed, fed, and maintain minimum standard of living. You should also factor any non-negotiable financial liabilities into this figure. In this area of planning, it’s a good idea to get an idea of what care home costs might be, should you end up needing one, and factor this in for the Later Years phase.
Next, consider any lifestyle spending costs that are important to you personally and that you’d prefer not to give up. This area is where the more meaningful figures come into play – your cash requirements should reflect the lifestyle you want to lead, not just the minimum standard of living. Whilst it’s important to understand your minimum required income as a baseline to build on, remember that life (and retirement) is for living and enjoying.
These costs could be things like eating out, gym membership, theatre trips, wine tasting subscriptions, holidays, and so on. Bear in mind that these are likely to be more frontloaded in the first 5-10 years of your retirement.
Finally, you can think big and add any ‘bucket list’ items you may have in mind, such as a trip of a lifetime, a holiday home, helping to pay for a family member’s wedding, or even just a really nice car.
What next?
Now you’ve got a figure – excellent start. The next steps are to work out how to make your savings, assets and retirement funds cover those expenses
This will involve:
- Creating an investment strategy that provides you with a reliable income, can keep pace with inflation and not take undue risks.
- Ensuring assets are arranged in the right investment portfolio and tax wrappers to ensure you maximise returns and minimise tax.
- The plan will also need to be adjusted constantly and regular in response to changes in circumstances, legislation, or both.
That’s where a skilled wealth manager comes in. Our team is backed by years of expertise, sensible, objective-driven wealth and investment management, and a history of inflation-beating returns. The Tideway team provides tax efficient income in retirement plans for numerous clients of varying requirements.
Get in touch with us using the form below if you’d like to speak to an adviser.
