Planning for retirement in ELT is a bit of a novel concept in itself as no-one mentions it much. So thinking about actual numbers for an ideal retirement income can seem a bit farfetched.
I get it. I barely know what I’m doing next year, let alone in 25 years’ time.
But the good news is that you don’t have to think that hard to work out what you might need in retirement and you can easily do better than plucking a number out of thin air too.
Though to be honest, even doing that is preferable to just pretending the day won’t come and making no plan at all. Anyway, read on and you won’t need to resort to the head in the sand method any longer!
How much do you need for retirement?
This depends on you so there is no real magic figure for everyone. But it’s still good to work it out so you have a goal and can start trying to reach it.
Some advisors suggest aiming for a figure of 70% of your current income. That makes sense if you expect your living costs to go down e.g. you’ll have paid off a mortgage, pay less or no social security, no longer have kids to support, have given up commuter costs and work-associated expenses like a car and a work wardrobe. We actually pay a lot to work which is a topic for another day!
Alternatively, plan based on your current income as your target income for retirement too. At some point you might want to estimate care needs too if private care is your expectation, or take out insurance against that possibility.
If you’re aiming for a luxury retirement with travel and expensive hobbies, calculate the income needed for that. You don’t necessarily have to pay for it all as you could find another way eg international house swaps and pet sitting. I recently met a 62-year-old military retiree who was pet-sitting all over the world. If that’s the plan then you know you need to own your own home and get experience with animals. Not all retirement planning has to be financial!
Work out what retirement income you know you’ll get
Investigate and add up the state pensions you can expect to get. That will be the foundation of your retirement but it kicks in at a set age. That age varies country by country but is over 60 usually, and could go up if governments say so. For example I will get the full UK pension, probably the minimum Spanish one, and the equivalent of 1 year’s German state pension. Not enough to retire on but a reasonable base to add to.
How am I adding to that? By contributing to private pensions and other investments. You may also have workplace pensions to add to this. These are things that will either pay out fixed incomes/pensions or they are pots that have grown to X amount. You should be able to predict roughly how much value they’ll have at the age you retire.
As a rough guide, plan to withdraw 4% of these pensions and investments per year. That’s your pension income on top of your state pension or any earned income.
Identify the gap
Once you’ve totalled the above and compared it with the income you want to get at retirement, you’ll either be on track, overfulfilling your requirements (yay!) or have a shortfall. If there’s a shortfall, you’ll need to pay more into private pensions, tax free investing, and save into low-risk investments to build up a pot that will pay you in retirement.
Whatever you do, the single biggest thing is to automate payments into these pensions and investments. Set up direct debits and, if you stop noticing the chunk missing out of your spending allowance, raise the direct debit. Keep raising it periodically until you’re on track for your goal or it starts to be unmanageable.
Now you’ve got a plan it’s going to be a lot easier to arrive at your destination than if you had no goal at all.
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