Financial Planning for Retirement 101

How many years of retirement will I need to fund?

Step 1 - What is your life expectancy? A woman born in 2004 has a 1-in-4 chance of living to 98 years old. A man born in 1984 has a 1-in-4 chance of living to 96 years old. If you live in the UK, you can get a very rough and ready estimate of your life expectancy via the ONS web site. For a more accurate prediction, you will have to give up more of your personal and medical information via a life insurance or longevity research web site.

Step 2 - What is your chosen retirement date? For many people, this will be the state or occupational pension age. In the UK, you can check your state pension age via this gov.uk web site. For a man or woman born in 1984, the state pension age is currently 68 years.

Step 3 - Using the example of someone born in 1984, with a life expectancy of 96 years, they would need to fund an average of 28 years in retirement.

How much money will I need?

What are your lifestyle aspirations? Do you expect to take foreign holidays? Will you own a car? Will you still be paying off a mortgage or other loans? Will you still be subsidising children or others who are dependent on you financially? As we can see, the question of how much money you will need is an intensely personal one.

Generic UK guidance suggests that a single person will need £14k pa for a 'basic' / 'minimum' living standard (no car and one holiday within the UK per year), whereas a couple would need a retirement income of £59k a year for a 'comfortable' lifestyle, including a car and foreign holidays. For a single person, the equivalent figure is £43k/year, underlining the fact that two people can live more cheaply than one.

So, our exemplary 'average' person born in 1984 and surviving to 96, would need 28 x £43k (at today's prices) in order to fund a comfortable retirement as a single person. To give you an idea, the simple total cost is around £1.2 million. Although the real figure would be higher, as costs would increase by inflation every year up until your retirement date, and subsequently.

Now, how big did you say your pension pot was?

How much money do I have?

If you are an employee, you will be earning pension credits towards the state pension by way of National Insurance contributions. You can find out your own state pension record, and how many years of contributions you have accrued, at the govt. web site, although you will need to register to use the service. It is important to note that this is a 'forecast,' as the amount you will actually get will change with government budgets and policy changes before your current retirement date. The full basic state pension is £221.20/week at the time of writing, for which you need 35 full years of qualifying National Insurance credits. This equates to around £11.5k per year, approximately 1/4 of the amount one might need for a 'comfortable retirement.' If there are gaps in your National Insurance record, it is possible to buy additional qualifying years. I would take advice as to whether this is suitable for you or not.

If you are enrolled in a workplace pension scheme, there will likely be a web site where you can go and work out what your current pension might be for a given chosen retirement date. You may have several 'bits' of occupational scheme if you worked different jobs over your life. Sometimes there can be value in transferring these schemes into your current one. In other cases it might be better to keep them in different pots. Again, this will vary according to individual circumstance and it would make sense to take advice before consolidating your pension pots, or not.

Other people may have a personal pension scheme, legacy stakeholder pension or SIPP. Generally a web portal will be available to find out the size of the savings pot to date and the ability to model what income it could provide at a specified retirement date.

It is perfectly feasible to fund retirement via other means: e.g. money in savings, investment accounts, gold, art work, property, cash etc. If you are relying on these, you will need to estimate what these holdings could be worth at your chosen retirement date.

What is the shortfall?

Having undertaken the basic exercises above, you will be in a position to judge whether you are in a position to meet your expected financial needs in retirement or not. If you cannot, options would include staying in full-time work for longer, saving more, or working part-time after you leave a main job. Others may derive a retirement income from renting out property. I guess the thing to watch out for here is income tax - both in retirement and beforehand, which is outside the scope of this basic primer.

The younger you are the easier it will be to rectify any shortfall in your projected retirement income. As things stand, for many people the easiest route to increase retirement savings will involve increasing contributions into a workplace pension scheme and / or opening a personal pension savings plan. The latter being the only option if you are self-employed.

Finally, some people will inherit wealth from their parents and others which can be used towards funding retirement. As a general rule, it is not wise to bank or depend upon such possible windfalls in retirement planning, as people's life circumstances may change. What you believed was to be 'your inheritance' may end up having to be used to pay for long-term care or other unforeseen eventualities.

Gavin Daker-White, PhD, DipFA

24th November 2024