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Pensions Planning: The NUMBER
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MoneySavingExpert
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Expenditure is high when retirement commences, as you are fit and active, so overseas holidays, etc, are all taking place.
As you age and become less active, expenditure needs decline.
As you get older, you start needing more help with things, which can be an expense. And as you approach the end of your life residential care will be very expensive, hence the U-shape of expenditure.
Personally my assumption is that my needs in retirement will increase each year with RPI, so I probably overestimate my income needs in mid-retirement but perhaps underestimate them at the end of retirement. Mind you, that is all many decades in the future for me, so I'll probably revise those assumptions several times over.
Given that I have passionately kept accounts for the total 34 years I worked, I found that although the 'shape' changed slightly the actual total amount had 'plateau'd' after the age of 50. In other words, my lifestyle - with which I was very happy - cost less than my income (significantly so in the latter years when I was raking it in, in the far east). All it did was go up broadly in line with inflation.
So it was a no-brainer to calculate "The Number" since I aimed simply to continue to draw the same 'inflation linked' income for the rest of my life.
So the other 98% of time was taken building my financial retirement model, taking into account all assumptions that could affect it, the value of my pensions, the value of my house, interest rates, investment rates, inflation, etc.
I didn't 'plan' to survive up to the age of 90, but as it happened, my 'best assumptions' showed me running out of money at about then (although my downsized house would still be worth a few bob). These assumptions were generally 'cautious' all round. It was important, too, to change each one of them - one by one - to see how 'sensitive' each one was. Inflation (without any change to interest rates) was a big 'risk', but militated somewhat by the fact that in reality, there would be saving factors like higher interest rates, and higher house inflation.
Consistent over-spending would, I found, start to make a big difference later on. But this is a discipline that I had always followed [i.e. I can tell you exactly the maximum I will spend in any one year. I track it, and if - as is often the case - I overspend, say, on petrol then I will automatically reduce another budget to compensate - say books. This has never let me down.]
I am now 5 years down the line, and can report total success. My original model told me I need to downsize at age 75. Best assumptions now are that I can leave it longer. In practice, I will probably do it sooner anyway.
Due to cautious assumptions, I find that I have about 3 times my annual spending 'squirrelled away' as 'surplus to budget'. Not bad in only 5 years (which have included a huge porperty and Equities crash), but this is about 60% due to better investment returns, and 40% due to spending less than I had planned. In other words, I'm spending about 20% less than I had allowed for. In truth, I am probably getting about 10% extra income than I had planned, once I ignore certain 'windfalls' that came my way on pension values, and Life Assurance maturities.
My spending pattern has changed somewhat (since working). When working, I would 'buy' things - like furniture or things for the house or gadgets. We simply don't need most of these now, but do splash out on a major 8 week holiday every year, plus one or two mini breaks. I have the time to make significant savings on my 'expenses' and on utilites (although we still lash out a huge sum keeping the swimming pool at an embarrassing jacuzzi-like temperature.)
I 'depreciate' the cars and so all I see is a monthly amount in my 'spending'. Hence when we buy new ones, they will not affect our spending at all. I bought a quality car 5 years ago, and will probably keep it another 3 or 4 years and permit myself the luxury of one more like that, but after that I expect I will revert to a cheaper car, thus saving money later in life.
So I would not suggest agonising too much over "The Number" other than to ensure that it is roughly equivalent to what you spend in the last few years of work. More importantly, simply make sure that your pensions and savings/investments will cover it. Once retired, treat it just as if you are living 'up to' a salary and just live within it. Find out what you pensions will produce. Get a state pension forecast. Value any Life Assurance policies or other investments you have. See if you can retire.
If you can't then if you have decent calculations, you should find that an extra year of saving does more than you think because (a) there's more cash, and (b) there's one less year you have to provide for in retirement.
People who don't save, and 'live up to' their incomes don't have to go through the hard work of planning all this out, since they will retire when the government tells them, after which they can sit and whinge about low benefits.
Which sounds eminently sensible.
So of course the questions are (if you don't mind posting here); What is your income in retirement and what was your retirement "pot"? What is your expenditure and what are the main items in it?
Thanks if you can help. Just starting out with all this confusing stuff -better late than never??
Yes, good idea.
I share your view that if its possible to find an enjoyable (part time) job and earn some "pocket money" in the process....all well and good.
I'm sure many part time jobs would be more enjoyable, simply because they are PART-TIME!:T
I dream of the time when I can reverse the work / leisure routine: Work 3 days, Take 4 days of leisure .... All part of THE NUMBER Grand plan!
Not at all.
The "Planks" are those that stay "on the shelf"
Like all of us, you are doing the right thing....ask as many questions as it takes to learn and gain knowledge....ask away!
There are no easy "One Answer" solutions though, it depends on many variables (and different opinions).
My answer to your question:
If you start at age 40, Save £370/month for 25 years to age 65.
If Interest on the savings are 4%
You will have a total sum of c.£200,000 at age 65
If you then "drawdown" 5% of this from age 65, that will give you £10,000 pa.
Is that any use, as a start?
Good Luck.
Or hope you can average a return of 4%+inflation. You would still need to increase your contribution in line with inflation.
I do not want to post actual figures. I did do a post moons ago but I can't find it now. But a bit of 'back of envelope' tells me that if my required spending requirement at the time of retirement was X, I actually had the following assets on the day I retired:
1. Pension schemes which between them would ultimately pay about 60% of X, but only after age 65 (some 10 years later) when all pensions would be in payment.
2. A Mortgage-Free house worth about 14 to 15 times X
3. Cash/Life assurance with imminent maturity dates/ISA's etc. about 12 times X
Taking into account "Book Values" of pensions (I had accurate technical values) I guess my overall "Balance Sheet" totalled getting on for 40 times X.
5 years on, I should have seen a small decline in my net worth in £ terms, but actually I am worth around 11% more than at retirement. I expect this, however, to decline somewhat over the next few years as the 'real' value of cash is eroding.
This might help
http://www.financialplanningweek.org.uk/financial-planning/Financial-Planning-Software.cfm