Probably the most important question in all of personal finance, and one that we get asked constantly is:
How much is enough to retire comfortably?
Bloomberg did a global poll earlier this year and the average response was a number between 3 and 5 million dollars. This was probably high because Bloomberg’s readership is wealthier than average. In the US alone only 4.4% of households have a net worth above 3m.
Back in the UK, Loughborough University does an annually updated independent research study called The Retirement Living Standards. It sets out a range of different lifestyles, for singles and couples. It concludes that as a couple if you want to live comfortably in London you would need £56,500 a year.
Using the crude 4% withdrawal rule and applying this to this annual income you get a target of £1.3m which is well below the Bloomberg figure.
In reality, the number you need may well be lower still as you should factor in the state pension benefits at 67.
The only way to get a more accurate result is to create a model using cashflow forecasting, with assumptions that are relevant to your current situation and likely financial future.
In reality, there is a big difference between what people think they need and what they actually need. This is because people are by nature conservative – they don’t know how long they will live, or what the economic and market outlook is. They want a margin of safety. But they also tend to overestimate their spending in retirement – in fact, studies show that our peak spending years are in our 40s and 50s as we raise our children to be adults.
It makes sense then that people over save and possibly underspend. Retirement is still a relatively new concept. It’s more of a process rather than an event. By creating a retirement plan, we can review and update our assumptions, and adapt our expectations based on whatever life throws at us. But knowing that you have enough now to get over the financial finish line, and sense checking that every year is arguably more important for your peace of mind than actually having enough.
If you want to find out what your number is get in touch with us.
- A pension is a long-term investment, and the value is not guaranteed. Any advice or considerations are personal to each individual’s circumstances.
- The value of your investment and the income from it may go down as well as up. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
- Levels and bases of, and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.
- Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
- Please note that the Financial Conduct Authority (FCA) does not regulate some aspects of cash flow, estate or tax planning or trust advice.