Financial focus month week 4: Win at Retirement Planning

Maybe it’s a weird perversion, but I actually like thinking about retirement. I call it retirement but what I mean is not having to work the good ole 9-5 anymore. Whether this happens at 40, 55 or 70 depends on you. In this blog post let’s look at all the things to consider when planning when and how you want to retire.

First things first – what sort of retirement would I want?

Start with that question as the outcome is what you should be planning for. In my case, I would like to die directing digital projects and writing content, but maybe not 40-60 hours per week. I would also like to exit the 9-5 world right around my 55th birthday, unless I have a change of heart and somewhere along the way become a solopreneur. Not everybody wants to be an entrepreneur, so for the purpose of this post, let’s assume that I am 32 and looking to stop working at 55.

I would like to be active in retirement and for me this means travel – therefore I should be able to afford 3-4 longer trips per year and activities where I live. I will live in a a relatively small property, probably not more than 2-3 bedrooms, without a mortgage, probably in the UK, at least during most of my retirement. I take care of my health now and plan on carrying on – I intend on being active in my late years but long term illness and critical illness care should form part of my budget.

After doing some careful maths, I expect I’ll need around £15,000 per year at current value in income to be comfortable. All my debts including mortgage will be cleared by then which means my living costs ought to be relatively low. I hope to live until the age of 90, if not longer resulting in approximately 35 years spent enjoying the golden years. On average a person lives just over 80 years in the UK, I’d like to do better.

How much should I be putting away?

Let’s put inflation to one side for the moment and assume it’s not a problem. The above figures indicate that if I were to draw from a finite pot of capital to achieve £15,000 per year for 35 years, I would need £525,000 in savings available to me.

Currently being 32, I have 23 years until I hit 55, my intended workplace exit age. To save £525,000 in 23 years I will need to stash away £22,826 per year or £1,902 per month. In my current financial situation I am able to put away just about that much while also paying off my mortgage. If you wonder how I know how much I can save, see 2019 Budget with REAL NUMBERS for my figures. However, if my income dips, a large emergency comes or I have a large non-emergency expense, I’m in trouble. To secure myself from such unexpected situations I have two options – either make more money/save more or defer my retirement should a problem occur. This is the hard truth but also the good truth – it’s up to me (and you) to make money and save money. In my case, hustle baby hustle, let’s make more money because things will happen along the way.

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What about the state pension?

I omitted social security from the above calculation for two reasons. Firstly, although this is unlikely, I am not entirely sure whether state pension will still be a thing in 23 years. State pension from 2019 will only be available from age 66 for women and at least 67 from 2028 – it seems to go up by 1 year every decade. Currently the state pension stands at £164.35 per week or £8,546.20 per year. If it does kick in for me, great, my kids might get some inheritance. Secondly, I am not yet sure if I will want to spend 6 months of every year in the UK, which currently is a pre-requisite to claiming state pension.

What about debt?

If you are looking at debt which will follow you into retirement, there is a little choice but to pay it off or keep working longer. Sorry – I don’t have a magical answer here. All I have done with my mortgage is plan it in a way that ensures it is paid off before I retire.

What to do if you don’t have any retirement savings

As with debt, the answer is binary. Start saving now or keep working. It’s not too late to work up savings for retirement unless you already are in retirement. And if you are, heck, find a profitable hobby, you should have enough life experience to know how to hustle!

Afterword and important information

Calculation above is based on a drawdown retirement option which refers to progressively paying out your retirement savings. I have excluded tax, inflation and assumed that the money does not multiply itself to show the simplest version of the calculation.

In reality, the value of your pension pot will grow if invested wisely and compound interest will accumulate to your benefit. In addition to the drawdown pension option there is a number of other retirement options available for your pension including annuity purchases, interest earned payments and more. If you are not confident in doing the research yourself, ask a financial adviser, speak to your HR team at work and check the gov.uk or your country’s equivalent websites for information.

Next week is the final week of this financial focus series and I will cover budgeting for a full year and the value of tracking your net worth.

 

 

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