How many of us ever make a conscious effort to spend time considering and planning our retirement? When it’s often deemed an issue that will affect us only in the distant future, it is easy to relegate the topic to the ‘back burner’ and spend our energies coping with our all-too-often frenetic working conditions, our families and fitting both into busy social lives. At the same time, many of us would like an early retirement. Yet, providing for retirement is a major consideration and one we all need to take a long honest look at, because it affects not only ourselves, but our families too. Deciding when we can afford to retire, yet maintain a particular lifestyle, requires careful retirement planning.
Early retirement – Facts
- At 65 the average man can currently expect to live another 18 years in retirement
- At 65 the average women can expect to live another 21 years in retirement
- By 2021 there will be more people over 80 than there are children under five
- Those between the ages of 25 and 44 are currently saving only about one-third of the amount they’d need in order to support their current lifestyles into retirement
There are a variety of perceived barriers to saving for retirement, including a strong sense of wanting to ‘live for today’, competing demands on income and a poor understanding of the available pension options, especially among young adults.
The statistics are especially worrying for women: around 50% of working women do not have a company pension plan and only 20% of women will receive an adequate pension when they retire. Therefore, proper retirement planning, making sure you are saving according to plan and that your savings are making the best possible return for your risk profile is essential. The stakes are high.
We answer some of the most common questions on retirement, retirement planning, retiring early, pensions, and investments below. If you would like assistance with retirement planning and in choosing the right investments, feel free to request a consultation from a financial advisor by filling in the box at the end of this page.
Early retirement – FAQs
When should I start retirement planning?
Now! Or as early as possible. Why do experts always recommend planning for retirement early? There are 3 main reasons. First, starting early gives you a longer runway, which means that if you are looking to save a fixed percentage of your income every month for retirement, that percentage will be much smaller over a longer period of time. Second, starting early, in your 20s or 30s, allows you to be more aggressive with investments, and invest more of your portfolio in riskier asset classes such as equities, which are expected to have high returns over long periods of time but may volatility in the short term. Third, starting early puts you in the right mindset and lets you make the right life-choices early – you might choose to skip that extra meal at the restaurant when you know how much smoother it could make your retirement.
How much money will I need at retirement?
A rule of thumb for answering this is known as the 4 percent rule. Historically, financial advisors have recommended that their clients withdraw about 4 percent of their initial portfolio at retirement, plus inflation. For example. If you have a GBP 2 million portfolio at retirement, in the first year you would withdraw GBP 80,000, the next year you would withdraw GBP80,000 plus inflation and so on. The 4 percent rule allows you to make constant yearly real (adjusted for inflation) withdrawals for about 30 years. So to know how much money you will need at retirement, you can use the rule in the other direction multiply the yearly income you would want by 25 (100% divided by 4%).
It is important to point out, however, that with life expectancies increasing and with benchmark interest rates close to all time lows, the 4 percent rule may no longer apply for many retirees. For instance, If you are looking to retire early, at 55, and may well live to 95, you need funds for 40 years rather than 30. You may also need more if you live in an economy where inflation rates are high (if you are an expat), or if you would like to leave an inheritance. To accurately determine how much you need, you have to model your yearly investments until retirement and yearly withdrawals after retirement, taking into consideration interest and inflation rates on your investments, in a spreadsheet for example. You may need assistance from a financial advisor to do this.
A Financial advisor can also assist in finding the right investment and retirement planning solution to reach these goals. For instance, trading in your pension for an annuity will remove the risk of outliving your savings, but at the risk of receiving a lower rate of income on your retirement savings.
How much do I need to save?
This depends on your current age and the income level you want at retirement. For example, taking the case above where you would like to retire at 60 with GBP 2 million in order to have a yearly retirement income of about GBP 80,000 until you are 90, and assuming you start saving for retirement at the age of 30, with investments yielding 5% a year, you’d have to save about GBP 2,500 per month, or GBP 30,000 per year.
Although starting retirement planning early and compounding interest helps (over half of the GBP 2 million you’d have at retirement would be from interest), it can still be a daunting sum, which is why planning carefully and ensuring that your pension is properly invested is essential.
When can I afford an early retirement?
If you started working and saving early, saved a percentage of your income throughout your lifetime according to plan – in a pension for instance – and have moderate income expectations for retirement, you may well be able to choose to retire early. However, if you started saving late, did not save a significant percentage of your income or had major financial setbacks, early retirement may not be an option, and the best alternative to address the shortfall might be to continue working for as long as you can, while adjusting your lifestyle in order for it to be sustainable once you do retire. Unfortunately, most people will not have the opportunity to retire early and at the same time maintain the standard of living they are used to. That is why it is so important to ensure that your retirement planning is adequate and that your investments have the adequate level of return and risk for your profile.
What returns should I expect on my retirement investments?
It’s hard to predict in advance, as market conditions change over time and as some investments involve risk. However, as of 2015, UK 30 year Gilts returned a little over 2.5%, whereas historic equity returns over the past 50 years have been about 3% higher than bonds, so currently around 5.5-6%. Some alternative investments offer higher returns.
The current economic scenario, in which benchmark rates are very low, makes it particularly challenging to reach retirement goals, which is yet another reason why it is important to begin planning early and to consult a financial advisor regarding the most appropriate portfolio of investments for your objectives.
How long can I expect to live after retirement?
Current UK estimates place male lifetime expectancy at 83 years for men and 86 years for women who have reached 65, which would mean about 20 years of retirement, on average. There are two points to bear in mind, however. Firstly, this is an average, and roughly half of retirees live longer. Most of us know people who have lived to their mid nineties and even a few who have reached 100. So in planning for your retirement, it is essential to build in a margin of safety in your life expectancy, to mitigate this risk with some instruments such as annuities and then to adjust your expenditure during retirement in case of a shortfall. Secondly, the advance of medicine and standards of living means that life expectancy is expected to continue rising. If you are young and have healthy habits such as exercising and avoiding smoking and drinking, you may well expect to live longer when the time comes for you to retire.
Seek professional assistance from a Financial Advisor
As we’ve seen above, retirement planning can be quite challenging. It involves long-term actuarial forecasts and estimates about changing parameters such as interest rates and financial returns. Selecting the right investments or choosing the right pension plan can also be difficult or time-consuming given the wide range of options and the impact of complex tax and fee structures. Furthermore, it’s a sensitive subject that can benefit from an objective outside view and a guide to keep things on track over such a long time.
Retirement Planning tip:
In order to have a retirement income of GBP 40,000 per year you should be saving GBP 1250 per month from the age of 30. This assumes you retire at 60, live until 90 and achieve 5% growth per year.
