How much money do I need for my retirement?

Jason Mountford, Financial advisor at our trusted Legal Services partner Irwin Mitchell, shares his expertise to help you achieve your retirement goals.

As a financial planner, this is (often literally) the million pound question. For many of us, the idea is that in order to be able to provide for our families, go on the holidays we want to go on, have a comfortable retirement or pay for aged care, we need to earn and save as much as humanly possible. In many ways, this isn’t necessarily wrong.

The truth of the matter is that the more money you earn, invest and save, the greater your options in all stages of life. So whilst working yourself to the bone for every hour in the day is more likely to put you in a better financial position, it may not be necessary in order to live the life you want to live.

Objective clarity

This is why your personal goals and aspirations are the most important part of any financial plan. Before you look into your pension, your budget or your investment strategy, you need to know what you’re trying to achieve. These goals and objectives will be different for people at different stages of life and should reflect what’s most important to you. It may be buying a home, providing for children or grandchildren, saving for retirement or ensuring you have enough money to pay for your care should you need it in later life.

Understanding what you want life to look like allows you to have a monetary figure to aim for. For certain objectives, like a house purchase, this will be relatively easy. For others, like retirement costs or costs for care, potentially a bit trickier.

Paying for later life

It can be hard to get an understanding of how much retirement or care is likely to cost each year, and for how long you’re likely to need it. The further in the future these objectives are, the harder it can be to work out. However, there are organisations that have sought to provide some guidance that can be useful.

Care home fees can vary even more than retirement expenses, but Age UK provide some great data on average weekly costs in different areas of the country.

From income to lump sum

Knowing the annual cost for something is only part of the equation. Once you understand how much income you need to meet your objectives, you need to work out how much you need to accumulate in order to meet this need.

The 4% rule for retirement

There are some crude measures, such as the 4% rule. This states that a 4% withdrawal rate from investments is likely to be sustainable for a retiree’s lifespan without the capital reducing significantly in value.

For example: a retiree with a £100,000 portfolio, should be able to withdraw and spend around £4,000 per year, every year from those savings and still have enough available for the future.

Again, this crude measure comes with a large number of caveats and can’t be guaranteed.  There are a number of factors that can affect the value of your savings, including:

• The level of risk taken with investments
• Changes in personal circumstances
• Unexpected events (like a global pandemic).

Cashflow planning

Realistically, the best way to really plan out your financial future is through cashflow planning or cashflow modelling.

For the tech-savvy or financially confident, a detailed spreadsheet can do a decent job, but for those that are seeking professional input and the most robust output, a financial planner can provide a huge amount of support and value. Through the use of complex, tailored cashflow and financial modelling software, they can provide clarity around how much you need to work, save and invest in order to live the life you want.

If you’d like to find out more about later life planning take a look at our Legal Services page.

The information given and opinions expressed are subject to change and should not be interpreted as investment advice. All data is sourced by IM Asset Management Limited unless otherwise stated. All financial and wealth management services are provided by IM Asset Management Limited which is regulated by the Financial Conduct Authority (FCA), FCA Firm Reference Number 402770.

Age Co Legal Services are provided by Irwin Mitchell LLP. AgeCo Limited is a trading subsidiary of Age UK (registered charity no. 1128267). AgeCo Limited registered office: One America Square, 17 Crosswall, London, EC3N 2LB (registered in England and Wales, no. 03156159). Irwin Mitchell LLP is regulated by both the Solicitors Regulation Authority for England and Wales and the Law Society of Scotland. Irwin Mitchell LLP registered office: Riverside East, 2 Millsands, Sheffield, South Yorkshire, S3 8DT (registered in England and Wales, no. OC343897).