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How much will retirement cost you, and can you afford it today?

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How much will retirement cost you, and can you afford it today?

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4 minute read

Discover how much retirement will cost you, and see if you can afford it today.

Planning for your retirement is far from simple. This explains why, according to research, the over-45s spend more time thinking about their holidays than weighing up their financial options for retirement. It’s enough to give you a headache.

Unfortunately, ignoring difficult tasks doesn’t make them disappear. And the less thought you give to your retirement plans, the more arduous the job becomes.

The answer is to break the job down into small, manageable chunks. Look at the big question – how will I afford to live once I stop working? – and tackle it in stages.

First of all, what you are really asking is - how much money will I need to see me through old age? But to answer that, you first need to answer another question - how much will my Prime Time retirement cost?

Start with the end in mind.

Will your living expenses fall?

The big disclaimer on any kind of financial forecasting is that you cannot be 100% certain what will happen in 10, 20, or 30 years’ time. Claims like ‘retirees on average spend a third less per month compared to their working lives’ have to be treated with caution. There are many factors that may have an effect, not least the fact that many retirees adjust their spending to suit their means.

Broadly speaking, many people do find that they need less money to live on than they did when they were younger. This is largely due to not having a family to raise and not paying for a commute.

Another important factor is mortgages. Anyone who is able to pay off their mortgage before they retire will cut a considerable amount from their living costs. Whether you are able to pay off a mortgage in time will be factored into your planning.

The key is not to assume or guess, but to calculate. You can only calculate correctly if you have a good idea or vision of what your Prime Time entails.

Budgeting for your lifestyle

There are certain expenses that cannot be avoided, before or after retirement. These include the weekly grocery shop, utility bills, transport, maintaining our homes, buying new clothes, and so on. Most people also enjoy a few creature comforts and luxuries, whether that means going on holiday, going out to restaurants, keeping up a hobby, or maintaining an active social life.

These ‘optional extras’ are the trickiest things to budget for, although they can have a significant effect on your spending. They are also typically the first things that people compromise on if they don’t have the money for their ideal retirement.

Consumer magazine Which? has done some very useful work surveying the spending habits of 6,000 retirees in the UK and calculating average living expenses. They break the results down into three lifestyle categories to find out the costs of an essential lifestyle, a comfortable lifestyle, and a luxurious lifestyle. Added costs such as long-haul travel and buying a new car every five years are factored in.

The findings are broken down into average living costs for single retirees and retired couples - revealing some considerable cost savings for the latter. The survey found that, on average, a single person aiming for a comfortable lifestyle in retirement could get by on £20,000 a year, compared to £27,000 for a couple.

For people wishing to budget for a more luxurious retirement, the survey found that average annual costs were £33,000 for single retirees, and £42,000 for couples.

While such figures are useful, they need to be used with several caveats in mind. If you are thinking about retiring 10 or more years in the future, bear in mind that the lifestyle you want might change over that time. Not to mention your personal circumstances.

In addition, the kind of lifestyle you lead is likely to change over the course of retirement. You might retire at 60 and spend several happy years travelling the world and enjoying the high life. But as you get older, those things may become less important to you.

Retirement could end up lasting a third of your life. Over that time, you will change, your needs will change, your lifestyle will change. And so will your living costs.

The big unknowns

Estimating the amount of money you need for your retirement years in advance will always be fraught with uncertainty. This is largely because of two major factors that cannot be predicted with any degree of certainty: how long you will live and what your healthcare needs might be in later life.

Longevity is a tricky issue. A nest egg that you put away to see you comfortably through from 60 to 80 will look very different if you end up living to 100. For that reason, prudent budgeting in retirement means living well within your means.

Try this calculator from the ONS. Please bear in mind that these are averages. Your own experience may well be different.

The other big unknown factor is healthcare costs. It is a sad but inevitable fact that, as we get older, some of us will experience a decline in health which may lead to complex care needs. The obvious example is no longer being able to support yourself in your own home and having to move into nursing or residential care.

Long-term care is expensive. If you have enjoyed the freedom of not having a mortgage to pay for several years, residential care may swallow that financial cushion several times over. Without careful contingency planning for how full-time care could be paid for if required, many people (and their families) find their life savings and assets swallowed up by the costs.

You can find a link to our blog on care costs here.

All of the factors discussed here - clearing major debts like mortgages, budgeting for your preferred lifestyle, and making contingency plans for longevity and possible care costs - provide a foundation for working out what you will need in retirement.

Useful tools

It is difficult to plan for Prime Time without being able to ‘see’ it in real-time. The next best thing is to plot it visually based on full and accurate data. Here is an example:

Source: Cashcalc Ltd

A series of ‘what if’ scenarios can be overlaid onto the plan. On the interactive tool each tab can slide to any year, to show the effect on your finances.

The chart evolves with each change. Provided the information is regularly updated, this tool can ensure that you don’t run out of money before you run out of life.

Your assets

The final step is to look at the means available to you - pensions, savings, investments, property assets, shares, NS&I etc - and see what needs to be done to match these to your financial forecasts.

If you don’t have access to a planning tool, you will need to create an income and expenditure schedule. The Money Advice Service has a free one which you can find here.

For some people in retirement, the family home can be considered for equity release. Always seek help from a qualified expert before considering this option. You can find the website for the Equity Release Council here.

As stated from the outset, none of this is easy. For the best results, and for added peace of mind, it is well worth seeking professional, specialist advice from experienced chartered financial planners.

Get in touch with Capital today, and let’s talk about your future.

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