How much cash at retirement?

Wentthedaywell?

Newbie here, my maiden post, so please make allowences if I'm doing something daft!

How long's a piece of string, but is there a rule of thumb about how much savings should one have put aside by the time one retires? I'm not talking about pension pot or house equity, but money in the bank.

I know they say you should have 3-6 months of net income when you're working - is there something similar for retirement? Thank you.

somethingcorporate

Largely pointless question unless you give us some reference points (required income, actual income, existing savings, other investments etc).

Even then it is still a pointless question since we can only speculate as some people have different levels of risk.

To be safe I would say about £5m.

Wentthedaywell?

somethingcorporate wrote: »

Largely pointless question unless you give us some reference points (required income, actual income, existing savings, other investments etc).

Even then it is still a pointless question since we can only speculate as some people have different levels of risk.

To be safe I would say about £5m.

Thank you, that was extremely uuseful answer regarding a general rule of thumb. I shall immediately start saving towards the £5million.

hugheskevi

is there a rule of thumb about how much savings should one have put aside by the time one retires? I'm not talking about pension pot or house equity, but money in the bank.

It is still quite likely to be 3-6 months income, which is your precautionary saving.

Provision of income and capital for retirement should be done in pensions, ISAs and possibly property investments, not money in the bank.

If you want a generic rule of thumb about how much in total you need across all saving vehicles, take target annual income in retirement and multiply it by 20. Consider deducting State Pension (say £7,000 pa) from target income depending on when you want to retire.

JoeCrystal

Wentthedaywell? wrote: »

Thank you, that was extremely uuseful answer regarding a general rule of thumb. I shall immediately start saving towards the £5million.

EDIT: !!!!!!, I did not read your post carefully enough. Forget about the rest of the post.

Nice to see you got a sense of humour. Well, it is really just working out much income you want have when in retirement. There is state pension but that would not be there for you if you want to retire earlier than your state pension age. I came across four rules of thumbs when lurking and posting on this forum.

1. To get realistic idea of contribution required from the start, halve your age as a percent of your salary to contribution. A eighteen years old might only have to contribute 9% of the salary compared to forty years old which pay 20%. That is just to reflect the fact it is cheaper to get same amount of fund to get same income if you got more time to pay into it. Of course, that tend not to work properly if you are looking for specific income as it then could be even more than the amount or less in some case.

2. You should have £35,000 in your pension fund value by age of 35. That is riddled with flaw such as it take into no account of achieving the level of income you want but it goes give some idea people are behind this amount or exceeding it.

3. In order to have good retirement equal to 2/3 of the final salary, you need to save 20%-25% of your income throughout entire working life. Often used as comparing the difference between defined benefit and defined contribution pension schemes, as it is, in many respect, taking into account of death in service and so on, it would be even higher cost. Nevertheless, it is quite good rule of thumb and the one I am following right now. The simple fact is that in order to get good income by private pension would require lot of contribution.

4. I see hugheskevi already mentioned the one where you multiple by twenty to get rough guide as amount of fund neeeded

Hope they are helpful. Of course, posters are more than welcome to rebuts or explain more about these rules of thumbs.

Cheers

Joe

Wentthedaywell?

Thanks Joe for taking the time to give a very comprehensive answer.

I'm in a final salary scheme - it should give just less than half my income (but I'll be mortgage free by then which takes up over half my net salary at the mo), plus a lump sum of 3 years' pension. And of course I'll get the state pension.

My query was less about pension income and more about a sensible level of savings excluding pension pot and house equity. Is there the retired equivalent of 3 months' contingency that is used when one is of working age? Bearing in mind there will be so salary coming in to replenish any spending out of it so I expect it needs to be considerably more than 6 months.

hugheskevi

My query was less about pension income and more about a sensible level of savings excluding pension pot and house equity. Is there the retired equivalent of 3 months' contingency that is used when one is of working age? Bearing in mind there will be so salary coming in to replenish any spending out of it so I expect it needs to be considerably more than 6 months.

If retirement planning has been done correctly, then you should still have the same effective level of income in retirement as you do in work.

Whilst the pension will likely to be lower, there is no need to pay National Insurance Contributions, retirement saving, travel to work expenses or mortgage. With correct retirement planning, the overall purchasing power should remain the same despite the lower income.

However, a lower income does remove flexibility, so more consideration of unexpected expenses has to be given. But I've found that those vary considerably across individuals.

For example, if someone has used a pension lump sum to replace their boiler, make a few other house upgrades and buy a new car, and their children are in well established jobs, then the scope for unexpected payments may be quite limited.

There is also a connection to insurance - when working, you may take the view that you won't take out insurance beyond essentials (house and car), and fund anything else out of savings - you should end up ahead in the long-run. In retirement that is much more risky. So the more insurance you have, the less scope for unforeseen expenses.

Whilst it varies across individuals, I wouldn't be happy without 6 month's income, plus at least £20,000 sitting around for who knows what (and I meant this as separate to any capital I may have hypotheticated to smooth my retirement income - that is essentially retirement income, even though it is in the form of captial). And I'd expect that figure to decline a bit as I got older. But that figure will vary so much across individuals I don't know of any rule of thumb. Considering the breadth of potential unforeseen expenses will go a decent way toward determining it though.

JoeCrystal

Wentthedaywell? wrote: »

My query was less about pension income and more about a sensible level of savings excluding pension pot and house equity. Is there the retired equivalent of 3 months' contingency that is used when one is of working age? Bearing in mind there will be so salary coming in to replenish any spending out of it so I expect it needs to be considerably more than 6 months.

The realisation that I came to when I re-read your opening post. And as for answering your question, no I never came across the retired equivalent. To be honest, the circumstances differ not much difference. After all, in retirement, pension essentially replace the salary/wages though for some though, they might need to take part time or full time job even to increase their insufficient retirement income.

The problem in my eyes regarding 3-6 months rule of thumb that it can drastically underestimate the amount. I tend to keep three month of my income in my current account as quick emergency fund and got other nine month worth of the emergency fund in the ILSCs because I felt that it would take me a year or so to find another job.

But supposing your got a family to take care of (unlikely situation I have to admit by the time you retire), or got greater commitments that you need to pay out in emergency then keeping three to six month in cash/savings may not be enough. It may require keeping a year or even higher amount. I would indeed argue that a truly sensible amount of savings is as much you can save.

Wentthedaywell?

Thanks Hugh, that was a very useful answer, and a reassuring one. I was thinking about 5 years' net income to be tucked away for spends, which I'll probably fall short of. But as you point out, outgoings/deductions will be much lower and with luck, my lifestyle shouldn't alter that much (except for not havign to work! :j )

Once I've paid off my mortgage, which I'm dramatically overpaying to the tune of half my net income, I'll try put the same amount into savings. By the time I retire, I'll have been effectively living on half my salary for quite a time!

Bigmoney2

Wentthedaywell? wrote: »

Newbie here, my maiden post, so please make allowences if I'm doing something daft!

How long's a piece of string, but is there a rule of thumb about how much savings should one have put aside by the time one retires? I'm not talking about pension pot or house equity, but money in the bank.

I know they say you should have 3-6 months of net income when you're working - is there something similar for retirement? Thank you.

I think the 3-6 months 'rule' stems from the idea that it will take roughly that time to get another job.
In retirement I think you need to look at it differently, i.e. what big expenditures are likely that you wont be able to meet from income e.g. new car, home repairs/ maintenance (new boiler/washing machine,TV etc), adaptations if health deteriorates.

Before I retired I had logged my monthly outgoings, so knew where my money went and how much I needed to live on day to day. When you retire you will be able to take upto 25% tax free, with a reduction in the amount of pension.
Only you can decide how much to take depending if you have debts/mortgage to pay off, plan on taking a world cruise etc.
So no-one can advise on a figure, it could be 10k, 20k 50k. It wil depend on your situation and expectations.

Wentthedaywell?

JoeCrystal wrote: »

But supposing your got a family to take care of (unlikely situation I have to admit by the time you retire), or got greater commitments that you need to pay out in emergency then keeping three to six month in cash/savings may not be enough. It may require keeping a year or even higher amount. I would indeed argue that a truly sensible amount of savings is as much you can save.

This is reassuring too. Yes, I agree, save as much as I can in the next 5 years. Then start blowing it all as soon as I retire!