Taboo #3 – Money. (Updated June 2019)
On the surface, you wouldn’t think money would be a taboo topic when it comes to retirement. After all, a lot of planning and calculating goes into how much money one needs to save and can withdraw during retirement. However, the challenges with money conversations go much deeper. Money issues can trickle down for generations and can not only destroy family relationships, but also leave unanswered questions and doubts in the eyes of heirs. What’s fair for one is totally inequitable for another. However, this is a subject for another Taboo #12 – Inheritance “Money makes the world go round; however, happiness greases the axle. Without this lubricant, life will seize.”
Paul Van Der Merwe
I would agree with that – money certainly helps pay for the shoe leather and other necessities of life, HOWEVER the idea that money can’t buy happiness has been disproved at least up to a point. Experts say that happiness does increase with wealth, but the correlation peaks at incomes of about $75,000/£60,000 per year.
Assuming we are none of us of the flat earth brigade, the world was always round, or at least for a very long time but there are arguments around actually how long this might have been. So too in retirement how long will we need our pot of gold for at the end of our rainbow as we transition from TOIL to TOYL and from our 3rd to 4th acts and eventual demise? (Essentially I think of Act 1. = Education, Act 2. = Work, Act 3 = Retirement/TOYL and Act 4. = Illness/decrepitude and death!)
Indeed, will we have enough money to ensure that if our 3rd act isn’t what we had hoped for, that is long and in good health but instead transitions rather quicker than predicted to a rather more costly 4th and final act due to ill health etc?
Let’s look at this a little more before moving on.
The 4th Act/Age: A Period of Psychological Mortality? Dr. habil. Jacqui Smith Max Planck Institute for Human Development, Berlin writes that although there is general agreement that the present and future cohorts of older adults can, on average, expect to live longer than previous generations however there is much debate about the quality of life that will accompany these additional years. There are two predominant viewpoints in this debate: One prognoses that, for most people, these extra years, in principle, could be characterised by positive life quality. The other viewpoint is more negative. It suggests instead that the extra years of life will be characterised by frailty, impairment, multi-morbidity, loss of autonomy, and loss of personal identity. Whilst we would all hope for the former and spend much of our retirement following our passions and SKIing, (Spending the Kids Inheritance!) the latter is likely less fun and more expensive. So the question is…what’s your number? In other words, how much do you need to retire comfortably? So far as I have read there is no easy answer although some claim the ‘conventional wisdom’ is that you should aim to have a nest egg 10 to 12 times your current income. This too is difficult to analyse – some feel the need for a bigger income to fund all that travel and those fancy cars, others feel that as the mortgage and debts are paid off and their passions are inexpensive to follow they will need only half their previous income. Where do you sit? For those approaching retirement, these figures might induce feelings of panic, denial and even dread. However the true retirement number is different for everyone. It depends on factors such as where you will live and how healthy you’ll be as you age. And most challenging of all — how long will you live?
What will your expenses be?
Many of us are not altogether sure what we spend now so a sensible first step might be to work this out and include everything you spend. Some expenses such as commuting to work can be removed and others such as more travel can be added in later, but first where do you stand NOW. Most of us will have an idea as to whether we spend all or most of what comes in or if we are savers and there is a growing nest egg. The first ten years are likely to be the expensive as we do those things we have been putting off until retirement and enjoy the TOYL – the Time Of Your Life!
What will your income be?
If you have invested in a Private Pension you may well be able to draw down a significant proportion to use for some of your expensive vacations, paying off the mortgage and other debts. The remainder will provide a regular income depending on the value of the pot and how much you take out. Most of us will be eligible for a State Pension which as the population ages will be paid out ever later – Currently I am due mine at 68, you need to check this and add it to your calculation, however it’s likely to move upwards over time! If there are other sources of income then add these in too, but don’t overestimate or rely too much as the world economy has a habit of being to say the least ‘volatile’ – That bit about ‘investments can go up as well as down’ should be taken to heart. Will you continue to work in some capacity? Have you a business idea that can generate income (..or lose?!) – Will this need pump-priming with a large cash injection? All these variables need to be considered.
Will your savings generate enough cash?
There is no way of knowing what will happen to inflation, interest rates or returns on investments. Regarding the latter, most Financial Advisers would suggest investments are switched to less risky instruments so that although potential returns are less than they might have been, the risk of losing a significant portion and thus income is minimised. Obviously the later you take the pension, the smaller the lump sum, the more income you can generate elsewhere and being a little more frugal the bigger the monthly budget. Remember that often the ‘elderly’ get discounts at the theatre and cinema etc. – What’s wrong with going to the matinee or seeing the latest block buster on a wet Tuesday afternoon?
Will your savings last as long as you?
As we live longer retirement plans we started decades ago may not have kept up. A healthy, upper-middle-class couple who are 65 today have a 43 percent chance that one or both partners will live to see 95 so savings need to be adjusted accordingly and assuming we will have failing health and some need for carers either at home or in a specialised facility this may well cost far more than we perceive. It’s well known that care-home costs are high, but research reveals that more than half of the population seriously underestimate just how expensive they can be with more than half coming up with a figure that fell well short of the average cost, so getting the right information is key.
In short, sorry to disappoint but there is no simple rule of thumb or one size fits all calculator. The world out there is possibly a less predictable place to be as we age, as economies and health can never be predicted with any certainty. So, my advice? Yes, get a financial adviser to help you calculate the money but do remember that it’s not all about €$¥£’s – health, happiness and attitude to risk all count too as does the position you start from. Tomorrow is the first day of the rest of your TOYL!
My long term and trusted Independent Financial Adviser Jonathan Davies has promised to write a piece with more figures but even he is as much a ‘Life Coach’ as Financial Consultant and so does spend a great deal of time discussing attitudes to risk, aspirations etc. (PS. He’s had a new addition to the family lately and hasn’t got around to this yet!)
What would you add to this?
Q1. What are your current outgoings?
Q2. What are the likely future expenses and/or savings in retirement?
Q3. If necessary could you live a more frugal life in order to retire earlier?