What you need to do to avoid 'Retirement Beyond Your Means'

Insight | by Stephen Kiggins
Financial planning 1

Ants and grasshoppers

When we think about attitudes to retirement there are – very broadly – two camps.

On the one side, we have those who are planning ahead. They’re like the ants from the old Aesop’s fable The Ant and the Grasshopper. Not only have they set goals for a comfortable retirement, but they’ve got a plan to achieve them.

Then there are those who aren’t as well prepared – and along with these ‘grasshoppers’ who haven’t given retirement much thought at all, there are also those who might have wondered “When can I retire?” but haven’t got close to achieving the answer.

For two decades, we’ve helped clients in more than 50 countries worldwide achieve financial independence and put robust plans in place for their retirement – so we take great pride in enabling people to move successfully from the latter camp into the former.

Recently, The Wisdom Council released some worrying findings. According to its Great Retirement Study, a survey of 2,000 55-to-75 year olds, nearly one third said they were either “not at all confident” or “not confident” they could afford a comfortable retirement. This compared with just one in five surveyed who said that they were “very confident” or “extremely confident” that they could.

Worryingly, the study revealed that a significant number of savers had quite unrealistic expectations about how their final pension pots would sustain them in retirement. On average, those surveyed believed their spending would be 92% of pre-retirement levels, but when asked about their income, they responded that it would only be 78% of their pre-retirement earning level.

This suggests that there are great many people who are facing “retirement beyond their means”, where the lifestyle they’d hoped for can’t be funded by what’s in their pensions.

How much is enough? Setting a benchmark

So, what should savers do? First of all, it’s important to have a picture in your mind of what your retirement will look like.. If you’re living abroad (as many of our clients do) will you be returning to the UK a lot to see family? Are you planning lots of travel, or will you be taking up new hobbies?

Costs and expectations can differ significantly from person to person and clearly the decisions and priorities underpinning how your ideal retirement would look will have a big impact on the all-important question, “Will I have enough?”

Research from Which? this month provides a series of useful benchmarks to think about what retirement could look like for you.

Taking care of just the essentials – paying for things like groceries, utilities, insurance, and home payments – will cost around £18,000 a year for a couple (£12,000 for a single retiree).

A more comfortable retirement, which includes European holidays, eating out and hobbies, takes you up to £28,000 a year (£19,000 for one person). A more luxurious option, including long-haul trips, buying a new car regularly and other costs such as leisure membership, cost a couple £45,000 a year (£31,000 if you’re single).

To give an idea of the total amount required, to fund the ‘comfortable’ retirement, according to Which? you would need a pension pot of £204,750 to get £28,000 a year from an annuity, or £144,950 to get this from income drawdown (where your money remains invested in your pension and you withdraw a regular income)[1]. For the ‘luxury’ option, a retired couple would need £664,450 to get £45,000 a year from an annuity and £470,850 for the income drawdown route.

With these figures in mind, how do they compare with the lifestyle you had in mind? And are you doing enough yet to fund it?

Our advice? Take advice

As we’ve mentioned already, retirement is a personal experience.

These figures can give you a useful benchmark for what to aim for, but what you personally require may be quite different. That’s why having a financial adviser can prove to be such an invaluable asset. We can help you understand the value of your cumulative pensions you have, what that means in terms of a future income, and, importantly, create a strategy for you that addresses any shortfall.

And that’s also why one of the most concerning aspects of the Wisdom Council survey is that while some overestimate their income, others also underestimate the importance of ongoing financial advice. While around half surveyed would be prepared to pay for a one-off review, less than 10% regularly used an independent financial adviser.

We believe that this is a fundamental mistake. Having a financial strategy in place is one thing but bringing that to fruition is another. A financial plan is never final, it’s an evolving entity, a long-term process that develops as you do. It takes into account a variety of potential factors, and incorporates strategies that can be adjusted as needed to help you achieve your long-term goals.

By regularly reviewing and adjusting the plan in response to changing circumstances, a well-designed financial plan can help people navigate market volatility, economic shifts, and regulatory changes, while staying on track.

Our clients understand this. They have asked the important questions already: “How much do I think I need?”, “What do I have to do to get there?” And, most importantly, “What do I need to do if circumstances change along the way?”

So, if you’ve not done so already, then our best advice is … take advice. Retirement isn’t something to dread, but it does need careful planning, especially when we consider the growth in life expectancy. Retirement savings need to last a lifetime and to continue supporting you in doing the things you love. The earlier you find out how much is in your pension pot, and how much you really need, the better, as that gives you time to adapt your plans and manage your savings journey as effectively as possible.

So if you’re not currently a Forth Capital client, but would be interested in speaking to us about creating a robust plan for your retirement – to turn the future that you envision for yourself and for your family, into reality – then book a free initial consultation with one of our advisers today.

[1] This calculation assumes savings grow at 3% per year

Follow us on...

Read more of our latest articles

Please complete the form below with your details and we will get back to you as soon as possible.

FC laptop 2
You must enable javascript to view this website