The ultimate question that we wish we had the answer to. If only we had a crystal ball to predict the future of our money, savings and pension. Unfortunately, retirement is the one thing we cannot foresee. We might not have a magic wand, but we do have years and years of historical investment market data to help us plan and make possible projections of what to expect for our retirement. This can be of great help when saving for retirement.

How to determine how much is needed for retirement?

Although it is virtually impossible to determine precisely how much you would need to retire, there are parameters we can use to help formulate a financial strategy for retirement savings.

• Look at your current lifestyle and expenses – This is a good indicator of how much money you will need during retirement. You can use it as a basis to either upgrade or downgrade income according to the kind of retirement lifestyle you want to lead in your golden years.

 For example, do you want a quiet lifestyle in the countryside, gardening and visiting family and occasionally eating out and going on short vacations, or do you prefer living in a city and eating out, socialising, travelling frequently, buying a second home for holidays, and joining a country club?

• Follow the historical fund data – By studying the historical data of funds, you can determine average returns and use it to indicate how they will perform in the future. We can use this as a guide to how our retirement investments will grow over the long term and what our savings will be worth when we retire. (This is only an estimation tool, as there are no guarantees of future performance)
• Knowing at what age or year you wish to start retirement – Your retirement age will determine the length of your retirement savings. The later you retire, the more time your money has to grow. Your savings usually earn the most compound interest in the last few years. So retiring early means you need more savings in your pension pot.
• Your current financial situation determines your savings contributions – You can only save as much as your disposable income allows. You can’t expect a lavish lifestyle if you can only afford to save a small amount every month. How much you save a month will determine your retirement income. 
• Consider the tax implications – consider the tax obligations on pensions when retiring and how much of your employer pension/ private pension you will pay to the taxman. Your financial advisor will help structure your pension in such a way as to mitigate tax. Keep up to date on the latest retirement tax law news. 

Example

Without considering annual interest and drawdown, if you earn £5000 a month and wish to earn the same when you retire at 65, you will need £5 000 x 12 months for a year = £60 000 x the number of years you would need an income for (people are living longer and are expected to live into their 90’s.) So £ 60 000 x 30 years of retirement (Life expectancy of 95) = £1 800 000 needed (this is only an example and does not take into account that your capital will be earning interest over the 30 years)

While the needed amount would probably be less, it is a good eye-opener of how large a sum you need to accumulate to survive retirement.

Although dealing with many uncertainties, your financial advisor is the most qualified to help plan your retirement and determine a plan of action to build wealth. Time is our greatest saving ally; the earlier we start with investment, the more our capital will grow.

Chat with your financial advisor to revise your retirement savings plan and ensure you have enough saved up to have a financially secure and stress-free retirement.

Please note, the above is for educational purposes only and does not constitute advice. You should always contact your deVere advisor for a personal consultation.

* No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above.