couple looking at their laptop

Why you shouldn’t underestimate the cost of your retirement

As you approach retirement, you’ll inevitably start to think about what you plan to do once you’ve stopped working and have more time to yourself.

A key part of your planning process should be to have an idea of how much money you’ll need to maintain your lifestyle after you retire.

From discussions I’ve had with clients, and from speaking to other planners, the common perception is that your spending will fall in retirement.

However, in my experience, this isn’t necessarily the case.

There’s also a tendency to underestimate how long your retirement may last. Latest Office for National Statistics figures confirm that the average woman currently aged 50 can expect to live to age 87, while the equivalent age for a man is 84.

So, it’s important to have a clear idea of how much income you’ll need, and how long your retirement fund will need to last as you put together your income strategy.

Every day is like Saturday

Think about your current lifestyle, and how and when you spend your money each month.

Like many people, it’s likely that you’ll do the bulk of your discretionary spending at the weekend. After all, it’s probably when you have most of your spare time. So, it’s understandable if that’s the time you’re shopping, eating out, going to the cinema, and so on.

In contrast, once you’ve stopped working, your weekends will last for seven days each week. This means that, subject to the lifestyle you’re planning, there will be no limit on when you could be spending money.

To an extent, it’s possible that you’ll spend the same amount in seven days that you previously have in just two. But the time will need to be filled, and you’ll have the opportunity – especially while you remain fit and healthy – to indulge in a lot of activities across the whole week.

You may also spend more time away from home. Not only long holidays, as you tick off items on your bucket list, but also long weekends and city breaks as you take full advantage of not being restricted by your annual leave entitlement.

If you’ve no idea of how much your discretionary spending will be, a good rule of thumb is to at least plan for the same level of expenditure as you have now.

You should have a clear idea of your income requirements

There are no hard-and-fast rules when it comes to knowing how much retirement income you’ll need.

However, research can be helpful as it can supply some ballpark figures of the income levels needed to fund certain lifestyles.

For example, a Loughborough University study reported by Retirement Living Standards suggests a couple would require an annual income of £54,500 to live comfortably in retirement.

Only you will know how much you think you’ll need to support the lifestyle and activity you have planned. So, the sooner you can start to quantify this, the sooner you can ensure you have the right plans in place to be able to fund it.

Review your current regular outgoings

To give yourself an idea of how much income you’ll need in retirement, take a look at your current regular outgoings.

If you take a quick look through your list of direct debits and standing orders, you may well be surprised at how few you’ll be able to cancel when you finish working.

No longer having to pay to commute to work is likely to save you money. However, the recent pandemic has seen a big uptick in the number of people working from home for at least part of the week, so that saving may not be as major as you’d first thought.

It’s also possible that your job provides additional benefits, such as private healthcare and life insurance, that you may need to fund yourself.

The biggest outgoing is likely to be your mortgage. According to a study by UK Finance reported in Which?, more than half of borrowers think they’ll still be paying off their mortgage in retirement. If you think you may be in this position, you may want to think about deferring full retirement if at all possible until your mortgage is repaid.

The cost of retirement makes planning all the more important

As you can see, it’s important not to underestimate the amount you’ll want, and need, to spend once you’re no longer earning a full-time income.

In a previous article you read about cashflow forecasting. One benefit of using such a system regularly is helping you stay on track to build the necessary retirement fund to meet your income requirements.

It’s also important to have the right investment strategy in place to help you meet your financial goals. Importantly, you shouldn’t see retirement as the end of your investment timescale. By continuing to invest effectively, you can continue to meet your income needs throughout your retirement years.

With no regular income to rely on, you need to maximise the assets you have. It’s much easier to balance income against expenditure if you’re benefiting from consistent growth on the value of your portfolio.

It’s also important to continue to save money regularly if you plan to continue earning in some capacity, perhaps through part-time or consultancy work. Once you’ve started flexibly drawing income from your pension fund, you can still contribute tax-efficiently to your pension.

In his recent spring Budget statement, the chancellor increased the Money Purchase Annual Allowance in the 2023/24 tax year to £10,000, meaning you can still contribute this amount to your pension and benefit from tax relief at your marginal rate of Income Tax – even if you have started to flexibly draw from your personal pension.

You should also consider other tax-efficient savings and investment options such as ISAs.

Get in touch

If you’d like to know more about how to plan for your retirement, then please get in touch.

You can call me on 07769 156 250.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Foster Denovo Limited is authorised and regulated by the Financial Conduct Authority.

Your home may be repossessed if you do not keep up repayments on your mortgage

The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.