This question comes up a lot.
As a Financial Planner, retirement is the big one. Many clients seek financial advice for the first time as they start to think about retirement - they want to know whether they’re on track to have ‘enough’ (income and capital) to maintain their desired lifestyle for the rest of their days. And whether there is flexibility, either to bring forward the date of retirement (partially or fully), spend more in retirement, or both.
Cashflow modelling is an essential tool here, combining your current position with various assumptions to project that position forward. This helps visualise whether you’re on course to definitely have enough, probably have enough, or potentially face a shortfall. We can then plan accordingly.
But cashflow is only as good as the inputs used and the key assumption in any retirement scenario is ‘how much you plan to spend in retirement’ - this can be hard to answer.
Quantifying the unknown
The issue is that our working lives can differ greatly to life in retirement. As such, estimating how much you might need to live your best life in a post-work era can be trickier than it sounds.
Typically, we will simply extrapolate our current spending patterns forward, but the reality is that spending will likely take on a completely different form. Certain components will increase, such as discretionary spending (hobbies and holidays) and insurance (car, travel, health). Whereas others will reduce, if not, cease entirely - dependent costs (in most cases, the kids will have ‘flown the nest’); work-related costs (travel and food, etc.); and mortgage repayments (hopefully paid off).
The ideal solution is to carry out a comprehensive budgeting exercise, with a ‘deep dive’ into what you plan to do in retirement, when, and how much it will cost. We can then build a fully bespoke cashflow model and compare this with your projected assets to gauge whether you’re on track.
An alternative option, or perhaps a starting point for those who are just beginning to think about retirement is to consider the PLSA’s Retirement Living Standards.
The Retirement Living Standards
The Standards are published by the PLSA (Pensions and Lifetime Savings Association). Their aim is to estimate what level of income you would need to live a ‘minimum’, ‘moderate’ and ‘comfortable’ lifestyle in retirement.
The breakdown is shown below:
Take the bottom-right cell. The PLSA’s Standards would suggest that a couple outside of London needs around £59k a year, after tax, to live a ‘comfortable retirement’.
In terms of what ‘comfortable’ looks like, this includes a two-week European holiday every year plus 3 long weekends in the UK; car replacement every 5 years; £450 a month on dining out; £3,000 a year on clothing, £1,000 a year on home repairs, etc. – you can find full details here.
The Standards are far from perfect. Everyone is different and will have varying aspirations and spending goals for retirement, in which case a more bespoke approach using comprehensive cashflow modelling is preferable. To some, £59k a year will sound extravagant, others thrifty.
Nevertheless, they’re a useful discussion starter. We’ll often use the expenditure levels as a starting point and then flex certain aspects, for example, increasing the holiday spending amount, certainly during the more active years of retirement; incorporating additional hobbies and leisure activities and their associated cost (a Lords MCC membership here, a season ticket in Gloucester Rugby’s shed there), increasing the dining out spending for more social couples, etc. We’ll then review and recalibrate this each year, referencing actual spending amounts during the early years of retirement.
What does a good retirement cost?
Based on the Standards, the figure lies somewhere between £3,500-5,000 a month, rising with inflation.
But define ‘good’ – this is individual. I observe many retirees who will happily spend significantly less. Whereas others say with bucket list travel aspirations, expensive hobbies (classic cars, artwork, etc.) and/or particularly busy social lives will spend significantly more.
Ultimately, it comes down to your individual goals and aspirations and that’s the really exciting part of the journey. It’s also where real financial planning can add tremendous value, providing clarity and confidence that such a retirement is affordable, and then, as one fellow adviser puts it, ‘holding your feet to the fire of your best intentions’, i.e. making sure you follow-through with the bucket list goals you drafted.
Please note, a pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. Since I don’t know your specific situation, none of this information should be construed as tax or financial advice. It is not an offer to purchase or sell any particular asset and it does not contain all the information which an investor may require in order to make an investment decision. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.
