Will I have enough to retire on?

• It’s entirely reasonable to worry about whether you have enough to retire on.

• There are many unpredictable factors like investment returns, inflation and health.

• Estimate your income and spending in retirement and aim to achieve a balance.

How much is enough?

If you’ve been pondering this question, you’re certainly not alone. It’s one of our most popular FAQs and a key motivation for seeking financial advice.

You’re right to be concerned because deciding how much to set aside for your retirement is a tricky business. The world has moved on from the days when you finished work with a gold watch and a reliable final salary pension that went up in line with inflation and lasted as long as you did. You may have to get your hands dirtier now and take charge of managing your retirement income yourself.

How much uncertainty can I stand?

If you’re nearing retirement, roller-coaster style investment returns are probably not leaving you feeling confident about your position. We’re having another ‘eyes shut’ moment as returns have taken a big coronavirus-induced dip, while the financial crisis of 2008 is still a painfully fresh memory [1].

In this environment the search for yield in reasonably low-risk places, as you approach retirement, is proving hugely challenging.

How low can interest rates go?

Shifting interest rates add a further layer of unpredictability to your planning. In a bid to offset global economic uncertainty, the Bank of England’s interest rate has never been lower (and it’s been going since 1694!) [2]. At 0.1% savers would be forgiven for crying into their bank statements.

Inflation is yet another unpredictable factor. Currently running at 1.5% [3], you may feel like you’re watching your savings erode away before you take anything out as income.

How long will I live?

People tend to underestimate how long they are likely to live [4], despite this being a key figure in retirement planning. According to the Office for National Statistics, if you live in the UK and make it to age 65, men will live on average to 85 and women to 87 [5]. So about twenty years.

You’ll want to consider the best-case scenario too (or the worst in terms of how much money you’ll need). Men have a one-in-ten chance of living to 96, and women to 98 [6] . That’s thirty years.

For a slightly more tailored answer, you can use the ONS life expectancy calculator.

How do I imagine my retirement lifestyle?

Take some time to think about how you live now, how much you spend on your current lifestyle, and how you’d like to live in retirement. Some people dream of sitting in the garden reading the paper, while others want to tour the world – although that’s off the agenda for the moment.

Do you want to stay in your home or downsize? How about going for semi-retirement and working part time? Maybe the extra money and/or the entertainment appeals? The number of over 70s working has more than doubled in the last decade [7]. What about retiring abroad? Would you like to join the thousands of UK retirees tempted by better weather and lower living costs?

Think about how your day-to-day spending will change. If you don’t have to commute to work, wear smart, dry-cleaned clothes and eat lunch in expensive city centre neighbourhoods, you may find your everyday spending reduces.

How much regular income will I have?

Factor in how much you’ll get from state and final salary pensions, which are thankfully a little easier to predict. Buying an annuity with your savings is still an option if you want the security of regular payments, but with low interest rates they can be expensive. How healthy will I be?

The state of your health will affect your spending in terms of healthcare, personal care and lifestyle. You can never be sure what’s going to happen, but taking into account your current health issues, family history and lifestyle (e.g. smoking and obesity) may offer clues.

DNA testing could highlight genetic predispositions for conditions like heart disease, brain disorders and cancer, and are available privately or even from the NHS if you’re willing to share your data for research [8]. Or maybe you’d rather not know.

How much would I like to leave to others?

For some people, leaving money to family or a good cause is a strong desire. For others it’s a case of ‘whatever’s left over.’ If you do have ambitions for a financial legacy, include this in your plans.

How much can I set aside?

You may have grand visions for a luxury retirement, but if there’s not enough money in the pot you may never turn them into reality. There’s a balancing act to work out between the life you live now and the life you want live in retirement.

Taking into account the possible wonders of compounding, a bit more money put aside now could mean a lot more money to enjoy later on. It can be a case of – do you cut your suit to fit the cloth or find a way to increase the amount of fabric you have?

Sources:

[1] https://tradingeconomics.com/united-kingdom/stock-market

[2] https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate

[3] https://www.ons.gov.uk/economy/inflationandpriceindices

[4] http://longevity.stanford.edu/underestimating-years-in-retirement/

[5] https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07

[6] https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07

[7] https://www.theguardian.com/money/2019/may/27/number-of-over-70s-still-in-work-more-than-doubles-in-a-decade

[8] https://www.bbc.co.uk/news/uk-47013914