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What kind of savings will you need to retire comfortably in the 2020s? What kind of strategy will it require of you now to achieve your desired lifestyle in “life after work”? The answers to these questions, of course, are different for everyone. Yet there are some sensible ways used by financial planners which can give a good idea of what kind of figures you should be looked at. This article offers some of our thoughts on this important subject.
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How much does retirement “cost”?
Retirement isn’t free – nor is it fully paid for by the government. Each year, you will need an income to support your lifestyle (since you will no longer have a salary). This can give you a good idea of how much you might need to cover your essential and non-essential expenses in retirement. Start by looking at your income now.
For instance, if you’re currently earning £30,000 per year then you may later need a retirement income equal to two-thirds of this (i.e. £20,000). This may sound unrealistic to live on, but bear in mind that some of your current expenses may be lower in the future. The kids may have left home, you will not face commuting costs and the house may well be paid off. Assuming you do, indeed, need £20,000 per year in retirement, you can start to estimate how much you may need overall. For instance, if you live for 30 years after retiring then you may need an annual income totalling £600,000.
Of course, this is just an example and your own retirement costs may be much lower or higher. Much depends on your own financial situation and goals, so it is a good idea to seek financial advice if you are wondering about the precise figures needed in your case.
Retirement – “getting by” versus living comfortably
Can any more light be shed on how much you may need for retirement in the coming years? According to the Pensions and Lifetime Savings Association (PLSA), there are at least three broad categories of “retirement lifestyle” which someone may hope to achieve one day – each involving different costs. Under the “minimum” retirement, a single person might need £10,200 per year just to cover their essentials. This may be achievable, for instance, largely through the full new state pension. In 2020-21, this entitles you to £175.20 per week – i.e. £9,110.40 per year. The remaining £1,000 or so could, therefore, be gained through some pension savings.
Under the PLSA’s definition of a “moderate” retirement, a single person might need £20,200 per year. This would cover extra expenses such as a new, second-hand car purchase every 3-4 years, a bigger weekly food shop and a yearly short-haul holiday (e.g. 2 weeks in Europe). With the third category labelled “comfortable” retirement, finally, a single person may need £33,000 per year. This would allow for a more luxurious lifestyle such as kitchen/bathroom replacement every 10 years, £1,000+ spending money on clothing each year and a nicer, new car.
How can I achieve what I need to save?
The first step in all of this, of course, is to establish a realistic goal with your financial adviser for your retirement lifestyle. Many of us may want the third category described above, yet for many people this will not be realistic. Others may be able to achieve a much better lifestyle than they thought was possible. As such, make sure you seek professional advice to ensure you are not chasing a dream or missing out on an opportunity.
Whether you are looking to cover £10,000 yearly retirement costs or £30,000+, it will be crucial to create a viable strategy once you have your goal established. This will depend on a range of factors such as your age, your annual income, your existing wealth profile, your attitude for risk when investing – and more. Here are some ideas to discuss with your financial adviser about how to start building your future retirement income:
- Build your state pension. As mentioned above, this could entitle you to £9,110.40 per year throughout your retirement lifetime. To receive this, you will need 35 years of qualifying National Insurance Contributions on your record.
- Review your current pension pots. Are these currently invested in poorly-performing funds, and there are better options elsewhere? Are the management fees you’re paying too high – eating into your returns?
- Review your investment strategy. Are you sufficiently diversified to ensure that your investments are not exposed to unnecessary risks? Are you perhaps investing too cautiously – potentially inhibiting the wealth growth which you might otherwise achieve?
- Review your contributions. Are both you and your employer currently putting the bare minimum into your workplace pension? What might happen to your pension pot if you negotiated higher contributions from your employer, or if you upped your own?
Conclusion and Invitation
If you would like to discuss your financial plan with a member of our team, then get in touch today to arrange a free consultation:
020 8366 4400 or firstname.lastname@example.org.