The FIRE movement is gathering momentum – those seeking to be Financially Independent, Retired Early and there has never been a better time to start planning for the lifestyle in retirement you want; starting early and investing for a long time gives you the best chance of achieving it.
It is not uncommon for pensioners to spend anything up to thirty years in retirement – and that’s assuming they work until their seventh decade; all that globe-trotting, golf and white knuckle rides on the Harley will add up to a pretty penny so it is imperative that you put a plan in place to ensure that they don’t miss a thing.
Ensuring that your current savings rate and investment regime are sufficient to support your desired future lifestyle is a difficult and potentially daunting process and even the most self-assured investor may decide that this is the point at which it is worth enlisting the help of a paid financial adviser.
However, there are some considerations that may inform your decisions and help you to get your retirement plan on the straight and narrow; some basics for twenty-somethings can be found here
What sort of retirement do you aspire to?
Your circumstances and aspirations will inevitably change over time, but it is important to have an idea of what it is you’re aiming for, as that allows you to start to budget for it.
Do you foresee a quieter life or a more active life than you currently lead?
Do you intend the world to be your oyster or will you seek the Good Life in your back garden?
Does retirement mean a merciful end to the daily commute and re-acquaintance with the snooze button or the freedom to pursue the business opportunity you have dreamed of for so long?
Only you can answer these questions and once you can do so you will be able to work out a broad-brush budget for the achievement of your ideal post-retirement lifestyle.
Those seeking a relatively modest, mortgage-free retirement whilst generating a small income from via part-time activities and restricting their travels to an occasional week in the sun may decide that a pension pot that will pay you £20,000 a year is sufficient.
However, those ‘Saga louts’ seeking to make up for the hedonistic time they feel cheated of by years of books and nappies and determined to party like its 1959, may find that an annual pension income of £50,000 barely covers the extreme sports.
Health and longevity will play a crucial role – those from families that boast a large number of telegrams from HRH will have to be extra diligent in ensuring that they make adequate provision for a long retirement.
Conversely, those with a lineage that indicates a propensity toward long-term illness need to consider how they will cope with it should the unfortunate happen —NHS treatment or private healthcare, family-dependent or specialist retirement home?
Then, there is the issue of what you like would to leave behind?
There have been some high profile instances recently where wealthy parents have said that they would like their offspring to make their own way, but most of us would like to give our children some financial assistance – particularly as the burden of student debt and raging house price inflation appear to conspire to make theirs a difficult lot.
So, How Much Do You Need?
There are clearly many variables to consider – lifestyle, longevity and quality of life will all influence the amount of money required in retirement.
It was once believed that it was necessary to have invested enough to receive an in-retirement salary equivalent to 80% of in-employment salary although many will find that 40% of their final salary will see them through three decades of retirement.
By way of an example, Muckle has created ‘Stuart’ who has just crossed the big 4-0 threshold and earns an annual salary of £70,000.
He plans to retire at aged 70 and is looking forward to a relatively simple life pepped up with an annual injection of international travel. Stuart enjoys good health and his family members regularly bat well into the late-80s.
lifestyle, longevity and quality of life will all influence the amount of money required in retirement
With the deeds to the house in the safe, Stuart’s monthly outgoings will reduce dramatically in retirement although indulging his wanderlust will add around £5,000 to his annual outgoings.
Stuart, not unreasonably, believes that he could live in relative comfort on £35,000 per year – 50% of his current salary, and expects to live for 20 years in retirement.
In order to achieve that annual income he would need to achieve a pension pot in the region of £700,000 and endeavour to invest in a way that he can live off a combination of withdrawals and interest.
£700,000 is by no means a small amount of money and is put in context by the fact that according to the Association of British Insurers, the average pension pot at retirement is just £36,800;
Sadly, statistics show that those closer to retirement faced with saving an unrealistic proportion of their salary just to achieve a miserable income in retirement often do nothing at all.
However, by starting early and planning well the young investor can achieve the lifestyle in retirement they want without living in penury along the way.
In our example, if Stuart were to invest 10% (£7,000) of his current salary into a moderate-risk portfolio (65% equities, 35% bonds) for a period of 30 years until his target retirement at age 70, he has a good chance of achieving the pension pot he targets.
To achieve this, Stuart would have to save £580 a month and reinvest any dividends; broken down thus the figures seem more achievable and with the prize being the retirement he wants, there is plenty of incentive for him to be disciplined in its pursuit.
However, those seeking to start earlier than Stuart may have a very different experience.
On the basis that little and often is better than nothing and never, and sooner is better than later, consider starting investing gradually and then increase it over time; this will allow you to save for retirement while also letting you save for other goals along the way.
Most twenty-somethings would say they could afford to save 1% of their income, and increasing that year-on-year by 1% would mean that in your thirties you’ll be putting away 10%, and in your forties, 20% – enough to start to make a significant difference and hopefully you won’t notice because it will be covered by increases in your salary.
As a general rule of thumb you should try to save 20% of your income to be secure in retirement; by adopting this method you should be able to average that out over time.
Setting up an automated investment plan means that you become accustomed to that money going out each month without having to constantly remind yourself why you should go for delayed rather than instant gratification.
For some, this might be as simple as making additional contributions into their auto-enrolled pension – the contribution your employer makes is as close as you’ll get to ‘free money’, and you should contribute as much as your employer will match.
How Can You Get There?
Reports of its death may be greatly exaggerated, but the finite nature of the State Pension is well documented; however there are numerous tools to help you invest your way to a comfortable income in retirement.
The Taxation of Pensions Bill put flexible personal pensions firmly centre stage – want to save £100 per month in your pension? Put in just £80 and the State will top that up to £100 with another £20 (20% income tax relief). Better still, if your company offers to also contribute to your workplace pension, that’s an offer of free money that you shouldn’t refuse and if you are a higher rate taxpayer you can claim back additional contributions up to your marginal rate.
Auto enrolment means that more people than ever are making provision for their dotage, and the government is sure to encourage participation still further as pensions are a huge burden on the public purse.
The number of companies that have defecits in their pension schemes is well documented; less well known is that entire countries face a similar dilemma with little prospect of balancing the books.
Financial self-reliance is certain to replace state provision, and those that make insufficient effort could face pretty slim pickings in their dotage.
compound interest, means that your retirement pension pot is more than just the sum of your instalments
One of the rules of investing for retirement is to start early – Einstein’s ‘eighth wonder of the world’, compound interest, means that your retirement pension pot is more than just the sum of your instalments: the cumulative effect ensures that the more years of interest you accrue, the greater your overall returns.
NISAs allow you to invest in stocks and shares without incurring income tax on your returns and come with the additional flexibility that allows access to the funds at any time.
In our example, Stuart’s employer decides to match his pension contributions up to 5% of his salary.
In addition to his £3,500 per year, just over £291 per month, Stuart’s employer pitches in with another £291 a month and State tax relief will top that up by another £73 to total £655 per month.
Not only has Stuart beaten his own goal of saving £580 per month but he’s done so at a cost of just £291 to himself.
In this scenario, our hypothetical forty-something is squirreling away 11% of his salary into an investment pot that should see him comfortably achieve the lifestyle in retirement that he covets.
Inevitably things will change over time, but by adopting a pragmatic approach to setting objectives, evaluating progress and adapting accordingly, Stuart should find himself sitting pretty on his seventieth.
His 11% sits within the 10-15% range that is accepted as a reasonable percentage of annual income to devote to pension provision and by starting at aged forty he has a good chance of achieving his objectives.
Muckle will return to the topic of retirement planning often and will invite readers to share their own experiences – its mantra will be that in the context of retirement planning ‘more and earlier’ is rarely an inferior strategy to ‘less and later’.