One of the common questions we are asked is ‘how much income will I need in retirement?’, hand in hand with ‘what will my costs be in retirement?’.
Now is a great time to start looking at what we spend our money on normally, and what our expenditure might be in retirement. This period of enforced lockdown provides an opportunity to examine your outgoings like never before. In addition, this change in circumstances may impact our shopping habits for ever.
When starting retirement planning we ask our clients how much they will spend in retirement, when they are often in their 40s working, with children at home. We normally receive blank looks and the figures they estimate have no substance at all. Knowing how much you are likely to spend in retirement is not something we often consider.
Here are some tips on how to approach this task.
1. What will you stop spending on?
My first suggestion is work out what you spend your money on now and what won’t be there when you are retired. This will include large expenditure items such as the mortgage, children (our biggest cost) or travel to work. You should also consider other costs such as regular take-way coffees, work clothing and lunches.
2. What will you start spending on?
Next, add in the things you would like to do when you are retired such as travelling, gardening, sport or new hobbies. We find that clients have plans for expensive holidays, financing the education of their children or grandchildren, or buying a second property.
3. Compare and contrast your forecasts
Keep running these two sets of figures and make a start on what a successful retirement plan looks like for you. Naturally we expect your future expenditure to be lower than your current costs.
For most people these figures will change over time however, if you keep the forecasts updated on a quarterly basis you always know what level of expenditure you are aiming for.
4. Which costs are essential?
Looking now at your costs you will no doubt see a variety of expenditure from the Council Tax bill to your annual holidays. Breaking these figures down to essential, desirable and luxury expenditure is the next phase of your retirement planning.
Essential expenditure represents everything you need to live at home such as food, gas, electricity, telephone and internet to name a few. We will all have our own definition of what essential means. Should wine be one of them? I will leave that up to you!
5. What will your income be?
You will need to decide how to cover essential expenditure when you retire. Some people opt to cover their known costs with guaranteed income such as an annuity, final salary pension or your state pension. I will cover the state pension in a future post as it can represents a vital part of any sound retirement plan.
As we have all recently been confined to home this is a great time to understand what your essential expenditure actually is.
During lockdown we couldn’t go out to the pub, restaurants or take short breaks so, what we have been spending during these months is a great gauge of what our real essential expenditure is. This is likely to be similar to our expenditure during retirement.
Many people choose to have a bank account purely dedicated to essential expenditure with Direct Debits and Standing Orders paying these bills.
6. Which costs are desirable?
Desirable expenditure relates to holidays, new cars and the upkeep of your home and garden. Once again this will vary from person to person. Desirable expenditure is vital to make retirement a happy and enjoyable period of your life, which for many represents a third of their lives. This is the money that you are really saving for and I will cover what a great savings plan looks like in a future blog.
7. What are your luxuries in retirement?
Luxury income is the phrase we use to refer to a once in a lifetime holiday, home extensions, helping out grandchildren to name a few. Having money available for luxuries can change your retirement from good to spectacular and will need some serious forward planning.
8. How to plan for retirement
The value of taking financial advice means having access to the various cashflow planning tools that predict what your future income may look like for the rest of your life. The decisions you make today will have either a positive long-term outcome or a negative one, and ultimately will impact your financial security during your retirement years.
The most important thing though is to have a plan and understand the implications of your decisions as you make them. We call this “informed financial planning”.
9. What are the typical levels of expenditure in retirement?
From my experience, some typical expenditure levels in each category for a couple in retirement are:
- Essential Expenditure – £12,000 to £18,000 per annum
- Desirable Expenditure – £10,000 to £20,000 per annum
- Luxury Expenditure – £10,000 to £17,000 per annum
As the numbers can vary greatly depending on your individual circumstances, please to get in touch with me for a no obligation discussion regarding your personal finances.
Author: Nick Onslow, Chartered Financial planner, The RU Group
This content is for information purposes and should not be treated as advice.