Do you know what retirement income you will need? Or what your spending will look like in retirement?
Do you know how much retirement income your current pension and investment portfolio will deliver?
When I start working with clients, many struggle to comprehend what their spending will look like in retirement but the answers to these questions will determine when you can actually retire.
Typical retirement income required
In order to know how much retirement income you are going to require; you need to know how much you will be spending in retirement.
A difficult question as you have to imagine your life in the future.
The Pensions and Lifetime Savings Association along with Loughborough University have done some great work in this area. Based on their research they have been able to define 3 different living standards and the annual expenditure for each.
So for a ‘moderate’ standard of living in retirement you will likely be spending around £20,200 per year if you are single and £29,100 if you are in a couple.
For a ‘comfortable’ standard of living in retirement you will likely be spending around £33,000 per year if you are single and £47,500 if you are in a couple.
These figures assume no mortgage and will be higher if living in London.
I urge you to check out the Retirement Living Standards Site as it has more detail on this and some great content to interact with.
Your specific retirement income
But of course this data is based on a broad range of people. You are an individual and your own retirement spending will be unique to you.
Another way to be budgeting for retirement is to consider your spending now. You are not likely to want to have a living standard that is anything less than you have now if you can help it. So getting on top of your spending and really understanding where your money goes now is key.
The ‘U’ shaped retirement?
Whilst it’s good to understand your target retirement income for the start of your retirement it is unlikely your spending in retirement will remain consistent.
A lot has been written about how people’s retirement spending is ‘U’ shaped. Meaning you spend more in the early years of retirement whilst you are fit and healthy. Less spending as you get older and no longer travel etc. Then spending increases again in your final years as you pay for care.
In recent years this theory has been challenged and actually the data shows that whilst spending may increase very slightly at the start of your retirement it generally then decreases throughout.
Older people generally keep saving as they get older! Especially if you have always been a good saver.
So whilst you need to know what retirement income you require at the start of your retirement, you need to factor in how this will change over time and it could even be prudent to allow for a percentage decrease each year.
This is important as it means the pot of money you need to provide that income may not be as big as it needs to be if you were trying to cover a consistent or increasing annual spend for the rest of your life.
How much generates the retirement income you need?
You have two choices with what to do with the pensions and investments you have built up by retirement.
- Purchase an Annuity or
- Keep the pot and use drawdown.
Using the Retirement Living Standards above, if you use your pension fund to purchase an annuity at retirement, then based on today’s annuity rates you will need the following pension size:
The above data is for a 65 year old male in good health and has an entitlement to a State Pension at State Pension Age of £8,500 per year. Annuity rate is a level annuity, 5 year guarantee. Sourced from Assureweb.
But of course the annuity route means you have no flexibility of retirement income. You can’t spend more at the beginning and then gradually less.
If you go down the drawdown route then you have the delicate balance of not taking out too much from your pot so as not to deplete too early.
Your pot will remain invested, so you need to understand what level of withdrawals are sustainable.
Using the same Retirement Living Standards we did in the above example; the following chart shows the probability of achieving the same income through drawdown without your pot running out before age 99:
The table above assumes a ‘medium risk’ investment strategy and total charges of 1.5% per annum. Income does not increase by inflation. Data sourced from CashCalc Drawdown Monte Carlo Simulator.
The outcome is produced after testing the strategy against tens of thousands of different inflation and investment return scenarios using actual returns from the last 20 years.
In the drawdown examples shown above there is the danger that inflation is higher than the annual decrease in spending you might want to apply.
Will the State Pension continue in its current form?
There is also the risk that you suffer from poor performance in the early years of your income withdrawals which means your fund struggles to recover.
All this goes to show is that there is no easy answer when it comes to working out your retirement income. There are many choices and factors to take into account.
This is at the heart of what we do. We have years of experience, seeing different clients with different lifestyles and retirement income. We use sophisticated planning software that allows us to map your retirement across a range of different scenarios so you can be sure you will always have enough.
If you would like a demo of how we can help then please secure a free 15-minute video call with us. You can speak to a Chartered Financial Planner who will listen to your situation, give you an outline of what you need to consider and guide you in the right direction.
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.