This is probably the most common question we get asked as financial advisers. Most people would agree that a lottery winning of a million would be very nice indeed. Some would however argue that a million wasn’t anywhere near enough.
Of course, it depends. The amount of money that would be enough to simply get by would be very different to the amount of money required to live a grand lifestyle. So, I’ve tried to break the question down into various components below.
To get by:
If all you are interested in is getting by in retirement, you would simply need a little more money available than your monthly expenditure each month. A surplus would of course be welcome for unforeseen emergencies and it would be prudent to build a savings reserve of around three month’s expenses. But how satisfying would a lifestyle like that be? You couldn’t be blamed for feeling a little hard done by, especially as we tend to spend the most money when we have the time to do so, and most people have a lot of time in retirement!
To be comfortable:
Let’s assume that the definition of comfortable is the ability to feel financially secure, that your state of mind would be free from financial stress and that you were able to afford everything you needed and most of the things you wanted. How much money would be enough to enable you to enjoy this state of well-being? Well, the numbers themselves are less important than you would think. This is because many people with good incomes in retirement could find themselves merely getting by due to a high-maintenance lifestyle. To be comfortable, what you may need is to have income well in excess of your expenditure, with some savings to act as a buffer for emergencies.
To have a great retirement:
Retirement is the act of ceasing to work. Which is what you do – albeit temporarily – when you take a holiday. Retirement may therefore be interpreted as the longest holiday of your life. What would that look like for you and how much money would be enough to sustain you? Well, using today’s annuity rates (this is an income you would receive each month in exchange for your pension pot, payable for the rest of your life), you’d need a pot large enough to pay you your required income at approximately 4.5% from age 65. In other words, if you required an income of £36,000 per annum in retirement, you would probably need a pension pot of around £800,000. This is a significant amount of money and why it is important to take retirement planning seriously. Start building your pension pot at an early an age as possible.
What about leaving an inheritance?
In addition to the worry of having enough to live comfortably in retirement, most of us would like to leave something to our loved ones when we die. Income from pensions would be all yours, however assets such as property and savings could be ring-fenced and left to your loved ones. Of course, inheritance tax could make a significant dent in whatever you left for behind, so planning for inheritance tax would be essential, especially if you have significant wealth.
Yes, a lottery winning of a million would go a long way towards relieving any financial anxiety, however those of us who live in the real world should take stock of our options and start planning as soon as possible. Speak to your independent financial adviser.