Article

"Reaping what you sow"

“How much do I need in retirement?” is a question often asked by clients. It makes sense, as one of the biggest fears people have is running out of money when they can no longer earn more. This is particularly so as life expectancy has increased, but not always in good health, and periods of retirement have lengthened.

| 7 min read

For most people, to enjoy the lifestyle in retirement they really want, there must have been some form of financial planning in place. In general, good outcomes don’t just happen by chance.

However, 51% of people focus on their current needs and wants at the expense of providing for the future according to recent research by the Pensions & Lifetime Savings Association (PLSA). This is understandable, it is difficult for younger people to even think about retirement, let alone know how much they will need. They might have future goals or wishes but the longer the timescale, the harder it is to define or visualise them.

So, how much do you need to enjoy a comfortable retirement? It varies greatly depending on circumstances and what type of lifestyle clients want to enjoy both now and in later years. But for those planning to retire at age 60, they may need to fund over 30 years of retirement. Not forgetting the effect of inflation, which can erode the real value of savings, especially over such long timeframes.

How much income is needed in retirement?

In general terms, according to the Retirement Living Standards issued by the PLSA, a retired couple need a minimum of £34,000 a year for a moderate lifestyle (£23,300 for a single person) in the 2023/24 tax year. This rises to £54,500 a year (£37,300 for a single person) for a comfortable lifestyle including more financial freedom and some luxuries such as three weeks of holiday in Europe every year. If you receive the current full State Pension of only £10,600 a year, this would mean a shortfall of £12,700 a year if you wanted to enjoy a comfortable retirement as a single person.

The PLSA figures assume that retirees are mortgage and rent free because this is still the situation for most of the population close to retirement. However, the situation is changing as increasing numbers are paying a mortgage into their retirement or renting rather than owning. The other key factor is the cost of social care, which is not included in the figures. So, there are additional expenses that may need to be considered on an individual basis in any financial plans.

But how do clients go from having future goals, such as wanting a certain level of retirement income in real terms, to drawing up a plan to make them achievable? The answer is proper financial planning.

When clients first come to us, they tend to fall in one of the following broad categories based on their current circumstances and lifestyles:

  • Not Enough – those that will not have sufficient funds to enjoy the lifestyle they want in retirement
  • Too Much – those that will have more than enough, which can bring different issues such as inheritance tax planning
  • On Target – those that will have the right amount in retirement, but they may not know it

    Whichever category you are in, financial planning can make all the difference. Crucially, it can help you identify where you currently sit and what you may need to do to enjoy the lifestyle you want in retirement. And the earlier you start, the better. I have never come across a client that says they wished they had started saving later!

    A plan towards your long-term goals

    Starting early enables clients to do something about their situation. Using a technique called cashflow modelling, we can illustrate why a client could find themselves in a particular category. For example, if it appears that they will not have enough in retirement, there is time to make changes – either with current habits (for example, saving more, spending less) or rethinking their planned future lifestyle (for example, retiring later, downsizing earlier). A small change can have a significant impact over the long term. Increasing savings by just 1% a year could make a significant difference to achieving long-term goals.

    Often, clients may have an ‘anti-goal’ – things they really want to avoid having to do in retirement, such as having to move home or forgo expensive holidays. By understanding these, a planner can build them into the financial plan.

    In the accumulation and growth phases of your financial life, there are four main elements you have control over:

    • How long you work
    • How much you earn
    • How much you save
    • How much you spend

    The best starting point is a review of spending. By that, we don’t mean budgeting, but knowing where your money is going and what you are spending it on. Understanding and knowing this shouldn’t feel boring. Quite the opposite! Being a conscious spender should feel empowering as it gives you control and allows you to spend on the things you want.

    Is it too early to start planning?

    The earlier you start saving for retirement, the more you can benefit from the power of compounding (the process by which the returns plus interest plus dividends are reinvested) to help generate additional growth over time. Therefore, the longer you invest, the more chance you have of being successful and achieving your financial goals.

    With greater resources in retirement, if you fall into the ‘Too Much’ camp, you may wish to support children or grandchildren, support causes you care about or know you can cover any unexpected medical expenses. Living without money worries gives financial freedom and peace of mind. With a proper financial plan, you can get your money working harder for you over the long term.

    It’s not all about the numbers, having a financial plan can help you understand what is important to you, who you want to spend time with and what you want to be doing. The non-tangible benefits of feeling empowered, in control and with peace of mind are also important rewards to financial planning.

    Does the proverb ‘You reap what you sow’ apply to financial planning?

    Absolutely. What you ‘sow’ comes down to how you manage your earnings and surplus income and means getting the foundations right. What you ‘reap’ is the reward of your planning, which you can enjoy later on in life. Whilst starting early gives you the best chance of achieving your goals, it’s important to say it is never too late to start. And sometimes a certain life event or milestone might just trigger that need for advice.

    Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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