I met with one client the other day who is thinking of retiring soon but is unsure whether he has built up enough savings and so asked me how long will retirement savings last?

The reason why this client and many others feel this is an important question is because if you knew the answer it could give you clarity as to when exactly you could afford to retire.

To answer the question “how long will retirement savings last” in its simplest form is easy, we just need to know how much you want to spend each year and we can then work out how many years it will take for your savings to run out.Image of a crystal ball so you can work out how long will retirement savings last

The problem is life isn’t that straightforward. Circumstances change, there could be problems with your house, your children might need your help, your health could decline meaning you need care etc. Therefore some years you may need to spend a lot more than you planned. Also there is inflation to factor in. The cost of things rises over time and therefore what you need from your retirement savings will increase over the years.

Most people I meet are also very unrealistic about when they are going to die. If their savings can get them to their early 80s they think this is good enough as they believe they will be gone around this time. But, depending on your age there is a 1 in 4 chance you will live to 100! The odds are increasing all the time. There is no point in your savings running out at age 80 if you are going to live for another 20 years!

At RTS Financial Planning we use sophisticated financial planning software that uses appropriate assumptions to forecast a range of scenarios related to your individual retirement prospects. We use this software and follow a 5 point process.

How long will retirement savings last? Use this method to find out

1.Work out your annual spending in retirement

  • Work out what you spend now and think about how this might be different in retirement.
  • Split your retirement spending into essential spending e.g. bills and food and discretionary spending e.g. going out and holidays.
  • Are you willing to compromise on either spending?
  • Don’t forget to increase your spending by inflation each year.

2.Be realistic about when you might die

  • Use the Office of National Statistics life expectancy calculator to get a prediction.
  • Factor in a buffer. Quite often we forecast to age 100.

3.Calculate your retirement savings pot

  • Don’t forget your government State Pension.
  • You can get a forecast here.
  • Other pensions, investments and cash savings.
  • Are you going to downsize and free up equity from your home?

4.Decide how much risk you want to take with your retirement pot

  • Do you want to leave the money invested? Or would prefer to give up the pot for the certainty of a guaranteed income for life?
  • The likely income or amount you can afford to withdraw from your retirement savings will be highly dependent on the amount of risk you are willing and able to take.

5.Forecast your income vs expenditure for every year of retirement

  • You should also forecast how your retirement savings will look each year.
  • If you don’t like what you see, change your retirement age and start again.
  • Alternatively look at your retirement spending and see if changes can be made.

Even when you have a plan and feel comfortable enough to retire the work on your financial plan shouldn’t stop. Your financial plan should be an evolving thing that is adaptable to change over time as none of us know what is around the corner. Building a plan today is wrong as soon as it is finished because it is all based on assumptions, but it’s the best you can do. It’s the journey that matters and the tweaks that can be made along the way. You don’t go to the gym once to get fit, you go on a regular basis to fine tune your exercise regime and maintain your fitness. Your financial plan should be no different.

If you would like a FREE demo of our financial planning forecast software using your own financial information please contact us and we will be happy to arrange one.

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