With an estimated 16,000 centenarians in the UK today, and an expected 110,000 by 2035, having a really long life is not a pipedream.
A woman aged 60 now has a 6.2 per cent chance of reaching 100, so it’s no surprise that pension experts suggest you structure your finances for retirement as if you will live that long.
But that’s not easy. Firstly, your spending needs are likely to change dramatically as you age. And if you save too much and spend too little, you’re left with an excess that will be taken by the taxman when you die.
Or if you save too little and spend too much, you could be left poorer in your later years or run out of funds altogether.
So how do you calculate your ‘enough’ number? That’s the amount you need for your ideal lifestyle which won’t run out, even if you live to be 100.
Top wealth planners reveal here how you can calculate yours.
‘Some of my clients see financial freedom as not having to look at their bank account,’ says Matthew Sellens, managing director and financial planner at Crown Wealth Consultants
1. What lifestyle do you want?
Do you want to see the world and spend money on globe-trotting holidays? Or would a more understated life tending the garden and going on UK breaks suit you?
Matthew Sellens, managing director and financial planner at Crown Wealth Consultants, says there are three different levels of financial freedom in retirement.
‘The first is that your basic needs are met,’ he says. ‘The second is your base needs are covered and you perhaps go on holiday once a year in the UK or abroad.
‘But some of my clients see financial freedom as not having to look at their bank account. They carry on doing what they used to do at the end of their career. That’s true financial freedom.’
Once you have worked out what type of lifestyle you want, you can get into the detail. After all, the cost of holidays is only one component – there are plenty of everyday bills you will need to factor in.
Make a list of all your possible outgoings in retirement, and estimating a cost for each based on your current spending. An online retirement budgeting tool can help ensure you don’t forget anything, such as haircuts, dentist visits and car breakdown cover.
Pension provider Fidelity has a comprehensive version on its website. The Government-backed Money Helper site also has one – visit moneyhelper.org.uk.
This is Money’s pension calculator can help you understand how your pot will grow and when you can afford to retire.
You may want to do this with your spouse, as you will have joint expenditures and income, and may need to align your lifestyles.
Although it’s not an easy conversation, it can also be useful to talk through how each of you would manage financially if the other died first.
Mr Sellens says the most common mistake that would-be retirees make at this stage is underestimating how much they are going to spend – not on big-ticket items such as an expensive holiday, but on the extra £15 or £20 you may spend every day on items picked up here and there.
‘In retirement there’s less structure so a couple may pop out to the garden centre for the day and spend £150,’ he says.
Working out your likely expenditure and planning your retirement spending is an intricate process because there are so many variables. A professional can help you through the process and make sure nothing is overlooked.
Lucie Spencer, financial planner at Evelyn Partners, says: ‘Financial planners can put in everything to do with a client into a specialised cash flow forecasting tool – including how much they are saving, how much they are spending, how much more they need to save. Planners will also revise this every year as your circumstances will change.’
Your ‘enough’ number is the amount you need for your ideal lifestyle which won’t run out, even if you live to be 100
2. When will you retire?
Your enough number will, of course, be higher the earlier you wish to stop working.
At first sight it may look like working out the total amount you will need would simply involve taking the amount you expect to spend each year and multiply it by the number of years you will be in retirement if you live to 100.
But the reality is much more nuanced. For example, you could continue to grow your pension savings throughout retirement if you leave them invested. That should bring down the total you will need at retirement.
Mr Sellens says projected investment returns will differ depending on how much risk you are happy to take with your savings.
If you take medium to high risk, you could typically grow your investments by 5 to 6 per cent a year over the long term. A medium risk portfolio is likely to produce about 4 to 5 per cent a year and lower risk 3 to 4 per cent.
Your enough number will be unique to you as it is based on your own circumstances, lifestyle aspirations and target retirement date.
However, the table (right) has calculations from Evelyn that give a ballpark figure for the amount you would typically need to have saved by the time you give up work to achieve your target post-tax annual income – whether that is £20,000 or £60,000.
Of course, the earlier you want to retire the more you’ll need.
For example, if you want to retire aged 60 on an income of £30,000 a year you’ll need to build a pot of £678,795.
But if you want to be financially free ten years earlier and receive the same £30,000 income each year, you’ll need a £931,366 pot. For more conservative spending of £20,000 a year from 65, you’ll need £304,997.
But if you want a £60,000-a-year lifestyle at 65 you’ll need £1,364,291 to make sure your money won’t run out before 100. These figures assume the full new state pension increases in real terms and is taken at 68, inflation is set at 2 per cent and investments grow at 4 per cent a year.
Your annual pension statement from your provider will give you vital information. As well as telling you how much you have and how much the balance has increased or fallen in the past year, it should also forecast what income it will give you if you continue to pay in until your target retirement age.
3. Budget for bigger costs
Your spending is likely to be highest when you first retire and are hopefully in good health, travelling and going out. It can rise again later on if you require care.
This is difficult to budget for, because although about 2.2 million over-65s need care at home, there are many more millions who still lead independent lives.
Tracy Crookes, chartered financial planner at Quilter Cheviot, says: ‘More and more of us might need to pay care home fees, but I try not to get too hung up on that. Not too many of us need care and the average length of time in care is four years. It may be covered easily by the sale of their property.’
Other financial planners take a different approach.
Mr Sellens often works out two plans for clients – one if care isn’t needed and one where care is needed for two to four years from age 85, for example. He says: ‘We build care costs in. The biggest consideration before giving away money is what if I need it for care.’
4. Downsizing bonus
Your finances may increase. For example, if you plan to downsize this could free-up cash. Consider also whether you are going to receive an inheritance.
5. Giving money away
If you want to give money to your children or charity you’ll need to build it into your expenditure – but make sure you have your enough number before helping others.
If your income exceeds what you will need, giving money away to family regularly can be a great way to reduce your inheritance tax bill. Gifts made out of your normal expenditure may immediately fall out of your estate for inheritance tax purposes.
But you need to make the gifts regularly and from income rather than existing assets for them to be free from inheritance tax.
If you later have care costs, you could redirect the amount you were giving away to cover them. You wouldn’t be able to do this if you had given away a lump sum.
6. Brace for a downturn
Alongside your enough number you’ll need two years worth of cash to avoid withdrawing from investments during a market downturn, explains Ms Spencer.
If your retirement savings are in stocks and shares Isas, general investment accounts or pensions, you don’t want to draw from them when the stock market falls.
Plus, she says you’ll also need a further six months of spending in cash to account for emergencies such as car breakdowns or boiler mishaps that you haven’t factored into your budget.
Imogen Congdon, a financial planner at Brewin Dolphin, recommends also considering lifetime Isas
7. Reaching the magic figure
Your enough number may look frighteningly high – after all, you’re planning for it to last you until the age of 100.
But there are lots of tools to make saving towards it much more manageable.
Pension tax relief can really lighten the load.
If you are a basic-rate taxpayer, every 80p you save into a pension is topped up to £1 by the taxman.
Higher and additional-rate taxpayers need only put in 60p or 55p respectively for it to be topped up to £1.
Imogen Congdon, financial planner at wealth manager Brewin Dolphin, says: ‘Pensions are fantastic. If you are a 40 or 45 per cent taxpayer, for any money put into a pension you are saving that amount in tax.
‘When it comes to drawing from your pension, you may be taxed at only 20 per cent.’
Also remember that you’ll have access to 25 per cent of your pension tax free – but after this you’ll pay income tax on withdrawals.
If you save into a workplace pension scheme, make use of employer contributions, which can help you hit your enough number even faster.
‘Also consider Lifetime Isas [Lisa],’ Ms Congdon adds. ‘Here, for every £1 you save you get 25 per cent from the Government, and they grow tax free.’
You can’t touch a Lisa until you’re 60 – and you can’t access a private pension until age 57 from April 2028. So you’ll need to plug the gap if you’re retiring earlier, at age 50 for example.
Stocks and shares Isas can come in handy, as you can access these at any time and investments grow tax free. Ms Congdon says that if you choose to retire early, you can drawn on the stocks and shares Isa first, then your private pension and about a decade later your state pension payments kick in.
8. Finally…
There is one way to ensure your retirement income will last for the rest of your life – and that’s working in the public sector.
Most public sector jobs, especially in the civil service, have a defined benefit pension. These will give you a guaranteed income for life, meaning you’ll never run out of funds – even if you live to be 100 and beyond.
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