An effective plan must consider many factors, including:
- How an individual lives their life now
- How they plan to live in the future
- At what age they plan to retire
- The pensions, savings, and investments currently in place
- The inheritance they intend to leave behind.
These factors will differ for each client and while there is no single answer to the question “How much is ‘enough’ when saving for retirement?”, Ermin Fosse are here to help find the right answer for you.
Understand the costs of different retirement lifestyles
Which? recently reported that an average retired couple would require £18,000 a year to cover “essential” living expenses.
This included groceries, household bills, and transport costs. For those retirees looking for a “comfortable” retirement, the amount rose to £26,000. A comfortable lifestyle was said to include the additional expenses of recreation and leisure (£1,476), charitable donations (£1,332), and expenditure on tobacco and alcohol (£1,008).
Many couples approaching retirement will be looking for more than a comfortable retirement.
Which? also included the average expenditure for a retired two-person household living a “luxury” lifestyle. Added costs associated with luxury living – including long-haul holidays (£7,620), European travel (£4,644) and a new car every five years (£4,861) – brought the total required to £41,000.
For single household retirees, the report suggests that essential costs will require £13,000 a year, while a comfortable lifestyle will cost £19,000 and a luxury one £31,000.
Understand the answers to these simple questions
How much do you have now?
To understand an individual’s financial circumstances, we take a holistic view. This means considering all the savings, investments, and pension products held. We will also review their current expenditure to calculate how much an individual can afford to save, building a full picture of a client’s financial life now.
We can then use cashflow modelling to identify trends and help to decide where an individual’s funds are best placed.
How much will your desired lifestyle cost?
The next step is to understand a client’s retirement goals – what would their dream retirement look like?
For some, this might be world travel. For others, retirement might mean downsizing and spending more time with grandchildren. Every potential retirement goal will have a different cost attached.
When deciding how expensive a retirement plan might be, it's also important to factor in an individual’s retirement date. With life expectancies rising, a retiree aged 55 might need to pay for their desired lifestyle for another 30 or 40 years.
And retirement costs aren’t static.
The early, “active” years after finishing work might be expensive, but costs could begin to tail off as retirement progresses. Factors such as the cost of care could see expenditure rise again in later life.
Do you have enough?
With a firm grasp of an individual’s current financial position and an idea of what their dream retirement looks like, we can begin to put a plan in place to link the two.
Understand the best ways to make up a shortfall
There is no correct answer to “how much is ‘enough’?”. Which? suggests a pension pot of around £155,000 would allow a two-person household, with both individuals entitled to a full State Pension annually, to live a comfortable retirement using drawdown, or around £265,000 if a joint-life annuity were chosen.
According to the report, this figure jumps to around £757,000 for a two-person household, with both individuals entitled to a full State Pension, enjoying a luxury lifestyle through a joint-life annuity.
At Ermin Fosse, the retirement plan we put in place will be unique to each individual. That means considering many factors, including:
- The value of investments
- An individual’s attitude to risk
- The amount of savings held
- An individual’s State Pension entitlement
- Any additional income, such as from buy-to-let properties.
Only through understanding all these things can we help our clients to decide how much is “enough” and then put a plan in place to make that amount a reality.
Where a shortfall exists, we might recommend:
- Topping up existing pensions and fully utilising employer contributions
- Making the most of pension and ISA tax efficiencies, for example by using all available allowances
- Re-evaluating risk profiles to maximise investments
- Lowering other outgoings
- Delaying retirement or opting for phased retirement.
Whatever “enough” looks like to an individual client, we can help to put a plan in place to make that a reality.
Get in touch
If you are worried about a potential shortfall or you would like to discuss any aspect of your retirement planning, get in touch now. Email firstname.lastname@example.org to find out how we can help.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Errors and omissions excepted.
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Ermin Fosse Financial Management LLP is authorised and regulated by the Financial Conduct Authority Financial Services Register No: 197438