How much money do you need to retire?



In this episode we discuss how much money will you need to retire? This is very much a personal question that doesn’t really come with an easy answer. There’s a lot of work that goes into planning for a big event like retirement and to give yourselves the best chance we’ve covered the essential things you need to understand to make sure you are confident and able to enjoy your first day of retirement from the very start!

Retirement planning is a very popular topic and most people will need to take advice to achieve the best outcome.

What expenditure will you need to support your lifestyle?

A good place to start is understanding is knowing what expenditure you will need to support your lifestyle in retirement. This should be broken down into essential and discretionary. Expenditure is often underestimated. We also tend to forget some big-ticket items like school fees, mortgage payments and contributions to savings will fall away when we transition to retirement.

The thought of retiring can cause worry for a lot of people because it’s such a big transition. The leap from earned income to reliance on money saved in pensions and investments can feel fraught and full of risk, as these monies will need to support you for the rest of your lives.

What else should I be thinking about?

Quantifying your guaranteed sources of income is a good place to start. Do you have any final salary pension schemes, what is the level of pension income payable and how does it increase.

You should then quantify what income will be available form your other investments including ISAs, investment portfolios and rental income

If you haven’t done so already get yourselves a state pension forecast to see what you’re on track to get – this will also tell you if you’ve paid enough National Insurance to get the full state pension. If not you can top this up.

It’s a good idea to differentiate between the different sources of income like state pension and your personal investments as some of these will be guaranteed and some will be variable.

Annuity or drawdown?

You will need to consider the options for your pension funds. DO you want to buy an annuity rate or do you want to consider drawdown. The answer to this will depend on the answer to a number of factors. What level of risk do you want to take, what flexibility to you require?

Annuity rates aren’t as attractive as they once were – due to the low interest rate environment we are on. However they can remain a good choice for those who want to derisk their retirement income and value simplicity.

What are the main risks of drawdowns?

You will need to assess if you have the appetite for risk to move into drawdown. You’ll need to make sure you have a good cash buffer to cover you if the stock market returns are down during periods you are drawing income.

You need to consider sustainable rates of withdrawal from your funds, this is considered to be somewhere between 3-4% per year. If you are drawing out at rates higher than this there is a risk that the pension will be depleted. If it is your only asset you could run the risk of running out of money at some point during your life time.

There has been a steady decline in the number of people purchasing annuities and more people moving into drawdown. This is a complex area. The high level numbers in a recent report by the FCA states 2358 withdrew funds of between £100,000 and £249,999 in the year before March 2020. This suggests people are not taking advice as they are paying more income tax than they might need to.

Have I got enough, how long will money last?

Key to this, is undertaking a lifetime cashflow projection. This will bring everything together to see if you are on track.

All of your assets are input into a sophisticated planning tool, assets such as :

  • pension pots
  • ISAs,
  • other investments
  • properties
  • rental income
  • future income like state pension as well as any defined benefit pensions

All expenditure goes into the lifetime cashflow projection for 30 -40 years’ time which maps out what your future income looks like and if you would run out of cash. Also, the basics are entered such as; the big holidays you want to go on. We stress test this under various scenarios to make it as life like as possible.

No model can be guaranteed as there are so many variables. However, we will look at things like stock market crashes, set assumptions for inflation, paying for the cost of care fees in later years. There will be two outcomes, peace of mind your on track that you have enough money to last you for the rest of your life, or perhaps wakeup call that you will run out of money at some point and that you need to make some changes.

So how much money do you need to retire?

This is specific to the individual and hence requires some thought and

The main factors are:

  1. What does it cost to live your lifestyle? Build a picture of how retirement will look for you and cost it out
  2. What are your assets? – Are they enough to power your lifestyle?
  3. What level of risk do you want to take? What level of risk do you need to take? –

To get the best outcome in retirement, you will need to undertake a comprehensive planning exercise. We’ve covered some key concepts you need to understand to make sure you are confident, and you are able to enjoy your retirement from the very start!

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This episode was recorded on  07/12/2020

This S&W The Pulse podcast is of a general nature and is not a substitute for professional advice. No responsibility can be accepted for the consequences of any action taken or refrained from as a result of what is said. The views expressed are not necessarily those of the presenter or of Smith & Williamson or any of its affiliates. No reproduction of this podcast may be made in whole or in part for professional or recreational purposes. No action should be taken based on this podcast and we accept no liability if we change your views on any of the subjects mentioned.

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Please remember the value of investments and the income from them can fall as well as rise and investors may not receive back the original amount invested. Past performance is not a guide to future performance.

Podcast information:

The Pulse from Smith & Williamson

Financial Planning Show: How much money do you need to retire?

Episode 4

Broadcast on Smith & Williamson at 09:00, 19th of JANUARY 2021

Available online from 10:00 on the same day .

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Anne McClean

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Personal financial planning
London - 25 Moorgate

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