How much money do I need for a comfortable retirement?
This is a very popular question for financial advisors. Generally, people want to know how much they’ll need to have saved in their pension pot to retire comfortably. The easy answer would be “lots of money” however, building a pension pot requires you to sacrifice some things today to prepare for a brighter tomorrow.
The best way to visualise retirement is like this: You’ve stopped working. Your children have grown up and flown the nest. You don’t have a mortgage and own your home outright. There’s no travel to and from work, no after work drinks on a Friday to buy and no lunching out every day. Life should be cheaper, right?
Related reading:
Is life cheaper post-retirement?
Generally, the answer is yes, but I’ll also throw an “it depends” into the mix. This is because, sometimes, the daily grind is so hectic that you don’t have time to spend. Weekends may involve flaking out in front of the TV building our reserves for the week to come. Living like that, costs very little.
When you retire, you generally have a lot more time to kill. Some call retirement “the longest holiday of your life”. Can you imagine being on a long holiday and being skint? Unthinkable. So yes, life should be cheaper post-retirement, but your lifestyle and hobbies could decide otherwise.
What will my retirement look like?
The first step is to picture how you’d like to spend your time. Some dream of a quiet life tending the garden and doing a bit of DIY whilst others envisage lots of activity, travel and time with friends and family.
Whatever floats your boat, it’s important to determine the lifestyle you may live and how much money you’d need to support it. Instead of thinking how much you’d need in your pension pot, think instead of how much your lifestyle would cost you monthly in today’s terms.
Once you have this income figure (or combined income figure if you are married), ensure that you’d be able to pay all your bills and have enough of a surplus to support your lifestyle. Your retirement age is also important. This money needs to last for the rest of your life so the earlier you retired, the more money you’d need.
Annuity or drawdown?
In the old days, your only choice at retirement was to purchase an annuity. You’d give the insurance company a lump of money in exchange for a guaranteed income for life. On the positive side, there’d be very little risk as you’d know from the outset exactly how much was coming in. On the negative side, this would be an irreversible decision.
The other option, Drawdown, was introduced in 1995. Here, your pension pot would remain invested, and you would draw a regular or variable amount as and when required. On your death, whatever remained in your pension pot would pass to your beneficiaries, in some cases, tax-free. The danger with drawdown is that drawing too much could erode your pot.
Related reading:
Crunching the numbers
There are many ways to calculate how much you’d need in your pension pot for a specific income. These calculations are complex and need to consider whether you’d be going down the annuity or drawdown route. This is where engaging a financial adviser could help. They would crunch the numbers for you and help you plan properly for the longest holiday of your life. Not to be taken lightly.
