What is the best way to save for retirement? Part 7 /7
Ok, this is the last part in the current series and rather than fill you with more information about planning a pension, lets start with what its really all about – your lifestyle. Any decent financial planning should (it’s a requirement, but you would never believe how few “advisers” mess this but up) begin by outlining your current spending. This is an exercise that hardly anyone likes doing, I think because it reveals who we currently are and have been and often this can leave us feeling somewhat disappointed or uneasy about our own “maturity”.
So, lets begin. Running your home – each month what does it cost? That’s mortgage/rent, insurance, council tax, utilities bills etc. Then lets turn to your living costs, that’s food, clothing, haircuts, dry cleaning etc. OK, so now how much does it cost you to run your car/s, commute, use the bus? Next healthcare – medicines, opticians, dental, then how about presents (Christmas, birthdays, weddings) and charitable giving. Finally, how much do you really spend on holidays, your hobbies and entertainment generally? These are all pretty much your lifestyle costs… but we aren’t done yet… and if you have children how much does childcare/schooling cost you?
Current financial stuff
Financial costs – how much are you paying to debt and loans? What are the balances, current rates and when do they end? How about your savings, investments and pensions? What are you currently putting away each month? What are the balances? Any financial protection (life assurance, income protection, critical illness cover? Cost and cover?).
So lets make an assumption or two – but please adapt this for your circumstances. When do you want to have the option of working? In other words you don’t need to earn money to pay for your lifestyle? Pause on this. It isn’t the same question as “when do you want to retire?”. So, lets assume (adapt) that your children if you have had them have left home, your mortgage is repaid and you don’t have a need for ongoing financial products (you might, but just go with it). So what does your lifestyle cost (this is a net – after tax figure for the year or month). Is there anything else? When you reach this point you will have more “spare time” to do the things you’ve been working hard for… so what are they? Extra travelling? that “bucket list”… what?… so what is your required income? When?
Let’s assume the State pension is still viable then, so knock off £5,200 (£100 a week) from the figure. What does that leave? OK, calculator ready? Quick rule of thumb… divide this by 4% to reveal the fund you need IN TODAY’S MONEY (not the same as the money you need today). Example: £20,000 /4% = £500,000. This is a rough estimate. We then need to figure out what this number would be (your number) when you want to stop working. So we really need to do all the sums and pull all the information together about what you have already. This is basic financial advice or as our American friends say “Financial Advice 101”.
This is usually where you need a financial planner to help pull apart your assumptions, explain what you really have and importantly explain what you can do to get on track and what returns you need. Want help? Call me. if you want more flesh on the bone, you might want to buy a book called “The Number” by Lee Eisenberg.
Dominic Thomas: Solomons IFA