How much do I need to retire on?

This is likely to be one of the most important questions any of us have to consider and one which is taxing the thoughts of thousands of post war ‘baby boomers’ at or approaching retirement. To answer ‘as much as possible’ is of little help. Some fairly detailed planning and number crunching is likely to be necessary with numerous variables needing to be factored in the mix. The starting point is really ‘How much annual income do you require each year to at least maintain the standard of living you desire?’ So, how much do you spend on the essentials - food, clothes, utilities and then consider all other items such including holidays, transport, entertainment, hobbies, books, gifts and so on. It all adds up!

Now to consider how long you will need the income for – the rest of your life basically which few of us (thankfully) know. The good news is most of us in reasonable health will live to a fairly old age. The bad news, however , is also that most of us will live to an old age as it all has to be paid for! For example: a couple reaching age 65 has a 50% chance that one of them will live beyond 92 and a 25% chance that will make it past 97! That’s potentially over 30 years of living to fund for from somewhere.

The other crucial element to consider is the effect of inflation – a relatively low rate of inflation (by historical standards) of 4% will almost halve your purchasing power over 15 years. Most retirees actually have a personal inflation rate well above that figure as they spend more on items such as utilities and healthcare which tend to increase faster than many other commodities.

Those who retire from generous index linked final salary pension schemes (especially from the public sector) are likely to feel most secure; for the rest of us however, serious thought needs to be given to what assets and resources we have or hope to have to ensure that we can enjoy our twilight years in comfort and dignity. Selecting the correct blend of investments using the main asset classes of shares, bonds, property and cash together with the most effective tax wrappers (including approved pensions and ISAs) to minimise exposure to tax where possible will be vital in ensuring that we don’t run out of money before we run out of life!

The idea of many of using their property as their pension is seriously flawed as last time I checked Tesco didn’t accept bricks or mortar as payment for groceries. Yes you can downsize to a smaller house if you had to but for many the equity released is unlikely to produce anything like the desired level of inflation adjusted income needed. It is difficult to be precise but if you needed an annual inflation proofed income of say £20,000, had a life expectancy of 25 years and were prepared to effectively exhaust the capital you would need a capital sum (excluding property) of around £600,000 – probably more.

Most western economies are facing a demographic time bomb as people live longer and longer. It is therefore essential that we don’t ignore it and hope the problem will go away.