Great ways to calculate when you can afford to retire

Great ways to calculate when you can afford to retire

The majority of people overestimate the amount of money they will need to retire in comfort. They presume that they will need the equivalent of their salary, which is not always the case. Whether you are selling your business, have a final salary pension scheme, or are building your pension pot, knowing your ‘number’ can be incredibly helpful in calculating whether you are ready for retirement.

Guessing the income you need to retire on is risky. Having too little can fill your retirement years with anxiety and penny-pinching. Deferring retirement or waiting for a bigger sale value on your business because you believe you need more money can cause undue stress. Why work when you could be enjoying your golden years?

Calculate how much you need to retire

There is no exact science to help calculate the precise amount you will need. You cannot predict the age you will live to. Unforeseen costs like long-term care can arise. However, you can work out an estimate. This will give you peace of mind that you will not run out of money before you run out of breath.

Start with the end in mind when working out how much you need to live on. You need to consider how you want to live in retirement and what you want to do. Asking yourself questions like; Where will we live? What kind of lifestyle do we want? What gifts do we want to give to our family or charity? Any hobbies or passions? How much and where do we want to travel? Do we want to buy a holiday home? All these exciting questions about your future will help to determine how much money (and income) you need.

What you are spending now, and in your first 10 to 15 years of retirement, is unlikely to be what you will spend in your later years. Throughout life, expenditure varies. It is predicted that people spend the most money between the ages of 35 and 64. Expenditure typically declines as you get older, as a result of paying off the mortgage and not having to support your children or parents financially. Adults 75 years and older spend the least money. Healthcare and insurance costs may rise with age, however the amount spent on travel, transport, clothing, dining out, education, and entertainment should all reduce.

In February 2018, Which? did a survey on 6,000 retired and semi-retired couples. Their research revealed that on average couples enjoying a ‘comfortable’ retirement (this covers all the basic areas of expenditure and some luxuries, such as European holidays, hobbies, and eating out) spend £26,000 a year. Couples enjoying a ‘luxurious’ retirement (including long-haul trips and a new car every five years) spend £39,000 each year.

If you would like to see the Which? breakdown of how the average retired couple with each budget spend on different categories, click this link.

If you and your partner retire and want to spend on average £39,000 a year you will need savings, a pension pot, or the proceeds from the sale of your business to be about £1,250,000 (or £625,000 each). If you are entitled to the State pension, this can reduce the amount you need to save.

It is essential to work out your own number, as circumstances vary massively from couple to couple. For example, many of our clients in retirement have a much higher annual spend than £39,000.

Need some help?

At Capital, your financial planner can help you plan for your retirement or post-sale life. You will benefit from a discovery session to identify what you want from your future. We will create a financial life plan (your FutureMap™) and illustrate how much you will need. Your FutureMap is tested using different scenarios like market downfalls or the need for long-term care. This shows how robust your financial life plan is and encourages you to anticipate changes. You can safely identify how far (or near) you are from being financially ready to retire, as well as how much you can afford to spend.

Planning for your retirement successfully means peace of mind and the great feeling of financial security, and enjoying your golden years without a financial worry in the world. Perfect.

If you would like to speak to one of our experienced financial planners about retirement planning and to discover your ‘number’ please click here to contact us.


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