How much money do I need to retire? Or to put it another way, what is my magic number?
You may not know this, but all of us have a magic number. And this is either an amount of capital or an amount of income with which we will feel happy with when we retire.
As we all know, it is notoriously tricky to actually calculate what this magic number is, particularly if we are some way from retirement. There’s no such thing as a crystal ball telling us how long we are going to live, what our spending patterns are going to be, and what requirements, such as healthcare, we may need.
This is strong reason why starting to plan early can help deal with unexpected events later in life. For younger people who are likely to live even longer and face reducing pensions, not to mention the additional challenge of low interest rates and investment returns, starting to plan earlier is increasingly important.
So where do you start? Here are some questions to ask yourself:
How long until I retire?
What state and company pensions can I expect and when?
What are my personal assets, such as savings and investments?
How much will my investments grow?
Am I expecting any inheritance?
What are the tax implications of my retirement funds?
What could be the inflation erosion on my assets between now and retirement?
There is also the question of using your home as a personal asset. If you are living in your home and it is not generating an income, then it is not an asset. If you decide to rent rooms via Airbnb or sell the house and downsize, or indeed if you have an investment property, then you do have an asset, and perhaps rental income as well. It is important to take into account the maintenance costs and taxation implications on both rental income and any capital gains if you should sell.
If you’re expecting any inheritance, it may be wise to be cautious about exact figures. Any injections of cash such as this can be used to pay off mortgage loans, increase cash reserves or be invested to provide additional retirement income.
To help calculate what you might need as an income in retirement, it helps to itemise what you spend each week over a three to six month period. It should then be possible to highlight which expenses you will not have when you retire, such as mortgage payments and financially dependent children. You may also have to incur the cost of a personally owned car and running costs. You may also want to travel during the early part of your retirement while you are fit and able.
Having worked out how much you wish to spend, you then need to look at what projected income you may receive from state and occupational pension schemes. Add to this any income generated from investments, including rental. If you have a shortfall, you may need to get capital working for you more effectively. Otherwise you will either need to save more or accept the fact that you will need to work longer or compromise on your lifestyle.
The idea behind all this planning is to ensure that you are aware of what you need to do to meet your retirement objective, in other words your magic number.
Specialist advice is essential for pension savings and other investments. Independent financial advice combined with specialist tax advice can be tailored to your personal situation and needs, especially if you have lived and worked outside your home country. To find out how The Fry Group can help you with your retirement planning, please contact us.