Financial advisor Warren Shute explains how to work out exactly how much money you’ll really need in retirement – and five things you need to know about saving for your golden years
This week will mark the 100th birthday of my father Howard Shute and this got me thinking, that my father retired around age 65 which means he’s had a 35 year retirement so far. Although this may sound wonderful to some, it actually worries the life out of me; what are the financial implications of having such a long retirement?
The average life expectancy in the UK is around 82 years, so living an additional 18 years can have a big impact on your finances. Inflation is your biggest risk in retirement, and far too many people become too cautious as they enter their retirement years. But over a typical 17 year retirement inflation can erode your spending power and leave you searching for more money, never mind having a retirement that is double this.
Since my father was born in 1925, inflation has caused the cost of a typical basket of goods to rise 50 fold, yes you read that right. Something that cost £10 in 1925 would cost more than £500 today. It seems a lot, doesn’t it? It’s an average rate of just over 4%, which is about what it is today, but a little higher than what we should expect long term.
How much do we need for retirement?
This is one of the most common questions that people ask financial planners. How much is enough will depend on what your retirement plans are. If you want to cruise until your final day, you’re going to need more than if you were content with your local community.
To put some numbers to the question, you can calculate your spending requirements to include everything you spend now, plus the additional cost of not being at work such as heating your home during the day and day trips and lunches out. Whatever number you come up with is likely to be wrong, so don’t worry too much about it, perhaps speak to some retired friends or family members.
From the figure you calculate, deduct the state pension and any other guaranteed income you might expect to receive, for example from a defined benefit pension scheme. If there is a shortfall, multiply this monthly figure by 300, this will provide you with a capital sum that will be needed to provide you with an income to meet your income shortfall, if it is invested.
This is an important point, the capital sum will need to be invested so that it can produce an inflation proofed income to pay you during all your retirement years whether this is 15 years, or over 30 years. The above is a great estimate, but typically we see spending profiles change during your retirement years, for example my dad no longer flys, and if we’re honest other than his basic overheads he doesn’t spend too much either, so it would be a shame to forgo experiences earlier in your retirement if you were expecting a linear increase in spending.
This is why I share my cashflow software Truth About Money with you, so you can design your own tailored retirement plan. Go to WarrenShute.com and use my free Cash Flow App to calculate your retirement needs. Happy Birthday Dad, here’s to many more.
5 things you need to know about saving for retirement
Saving for retirement should be a top financial priority for you: it’s never too soon, or too late, to plan for your retirement. Here are five things you can do to get your retirement plans on track.
- Get a state pension forecast, either online via gov.uk/check-state-pension or by completing a BR19 form.
- Ask for your defined benefit pension statement to see what pension you will be entitled to
- Ask your defined contribution pension providers for updated valuations on your pensions, to see how much you have saved
- Use the Truth About Money (https://themoneyplan.truthaboutmoney.co.uk) to see if you’re on track for what you want
- Track down any pensions you may have forgotten about by using the Pension Tracing Service www.gov.uk/find-pension-contact-details
