It’s interesting how one of the most popular questions that we’re asked these days is also one of the hardest – ‘How much will I need for my retirement?’
The natural starting point is to use what we’re spending now and average it out over how long we expect to live. This often produces unrealistic figures that seem unachievable, but is this the right way to approach what we think we’ll need?
Retirement Income Targets – the retirement smile
There’s a misconception that you’ll keep the same spending habits during retirement that you had before you retire. However, in reality spending costs will probably decline through most of your retirement. Research suggests that, as new retirees, spending habits are hard to break and so costs decrease slowly in the early years as you enjoy more of the ‘good life’. This spending decrease gathers pace as your mortgage and debts are paid off and the daily commute is no longer required.
But this doesn’t mean that our outgoings remain at a minimum as they start to increase again as we approach 80 years old as a result of the increasing costs of health care in later life. This generally produces the below graph:
Ref: Journal of Financial Planning, Exploring the Retirement Consumption Puzzle. Research by David Blanchett, Head of Retirement Research at Morningstar Investment Management.
This should be a factor when planning your own retirement especially when thinking about how much money you think you’ll need as well as the management of it.
Have a think about what you’ll spend in your retirement – your mortgage will be paid off and your car may no longer be on finance plus, your children might have families of their own. Once you’ve worked out what you think you’ll need, to enjoy a comfortable retirement, you can use our pension calculator to find out how much you need to save in order to achieve the retirement you want.
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