How do you achieve a £4,000 per month retirement? As in, how can you stop working and spend £4,000 per month in real terms by withdrawing from your savings for the rest of your life? 

There are usually two ways this might want to be achieved. 

The first way is you preserve the capital element of your savings in real terms whilst still being able to spend £4,000 per month. This is generally the safer option as you don’t know when you are going to die and it allows you to pass on your wealth to your children and grandchildren.  

The second way is that you don’t preserve your capital and instead keep withdrawing the amount required for your £4,000 per month spending and over time your capital will be depleting. This could be the option for you if you don’t want to leave anything behind. It’s the riskier approach because it’s a delicate balancing act. Withdraw too much too soon and your money might run out before you do.  

Let’s look at a couple of examples.  

We will use a married couple who have both recently turned 65 and have both now retired. 

Both will be due full State Pensions at age 66. 

Between them, they want to spend £4,000 per month for the rest of their lives. Remember though, prices for the goods and services they used tend to double every 10-15 years so the £4,000 per month they spend at the start could be £8,000 per month by then. So, we will assume the £4,000 per month spend increases by inflation each year. 

Based on Office for National Statistics life expectancy data there is a 10% chance one of them will still be alive by age 100 so we will use this as the end point of the plan. This means a 35-year retirement. 

As well as full State Pensions the couple each have £525k in personal pensions charging a total of 1.3% per year in fees. These are the only sources of income and savings we will use to produce their £4,000 per month net income.  

If we test their plan across multiple 35 year rolling periods over the last 109 years, we get the following results.  

Graph 1 for A £4,000 Per Month Retirement

Across 864 scenarios, the couple would be able to achieve their £4,000 per month spend in retirement and pretty much preserve their original capital even in the worst case.  

In fact, the median scenario resulted in their capital growing in real terms to £5.33m and in the best-case scenario growth to £12.9m. 

So, a total pension savings pot of £1.05m along with two State Pensions would achieve the £4,000 per month spending and preserve capital in real terms.  

But there is a big variable here. The clients achieved this because they invested their pensions 100% in global equities.  

Let’s look at the same example but this time they only invest 50% of their pensions in global equities and 50% in global bonds.  

Graph 2 for A £4,000 Per Month Retirement

This time we can see that the couple still achieve their spending target in all scenarios but this time in the worst-case scenario their final capital amount is only £300k in real terms.  

This shows the power your chosen investment strategy has over the long-term.  

But what if the clients weren’t bothered about leaving any wealth behind? Perhaps they don’t have children or own a large property that will be enough to leave the children.  

So, this time we will go back to the first example, investing the pensions 100% in global equities but still wanting to spend £4,000 per month in real terms for the rest of the plan. However, instead of starting with £525k in pensions we want to see the lowest amount they can start with to end up with nothing by age 100.  

Graph 3 for A £4,000 Per Month Retirement

We can see here in the worst-case scenario a pension pot of £420k each along with two State Pensions did sustain £4,000 per month spending in real terms but ending up with zero by age 100.  

The median and best-case scenarios still left comfortably more capital behind.  

But again, if we change the investment strategy to 50% global equities / 50% bonds the money would have run out by age 92 in the worst-case scenario. 

Graph 4 for A £4,000 Per Month Retirement

Planning for your retirement is not an exact science, it’s more of an art. Adapting to the changing landscape.  

Having clear objectives in terms of what lifestyle you want will help you determine the appropriate investment strategy.  

Remember, two of your key risks in retirement are rising prices and longevity. You need to factor this into your retirement plans and make sure you have enough. 

If you would like to know your number needed for retirement and to stress test your retirement plans or even to get a plan in place then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy and protected retirements over the years. This could be you too.  

*Charts and data provided by Timeline. 

 

Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.