One million pounds. It sounds like an enormous sum doesn’t it? Certainly enough for you to be able to stop working at a reasonable age and retire in the manner to which you are accustomed…
Or is it?
And then there is the small question of whether £1 million is an achievable sum. It seems like a daunting figure, possibly a fantastical one if you are an average-earner. Even if you have a decent-sized salary, the pressures on your earnings from rent or mortgage payments, education fees and an ever-increasing cost of living could mean that you can’t save as much as you would wish towards retirement.
Survey after survey confirms what most of us in the financial industry already know, that the vast majority of workers are not saving enough towards retirement. As final salary and defined benefit pensions have become the rare exception rather than the norm, the responsibility for amassing enough to live off in retirement has shifted soundly on to the already-burdened shoulders of individuals.
And most people are ill-prepared and, consequently, plagued by worries about the future. Many are concerned that they may never be able to stop working. A UK survey from Interactive Investor highlighted the biggest concerns of 10,000 British non-retirees and top of the pile was not running out of money. It’s probably no coincidence that 52% of those questioned who were still working said that they planned to keep working into retirement, either part-time or as self-employed and one in four current retirees are working in some shape or form. For some this is a choice but others are forced to do so to pay the bills, which is not a situation any of us want to find ourselves in during our latter years.
If funds are limited, saving for retirement is a delicate balance between sacrificing pleasure today for financial security in the future. How do you decide whether it is worth skipping that weekend away in Vung Tau so you don’t have to spend your retirement subsisting entirely on lentils and rice?
The secret, in my opinion, is to have a plan. Once you have concrete retirement goals in place and a specific amount you need to save each month, you can splurge the rest guilt-free knowing that the future is adequately taken care of. The difficult bit is formulating the plan.
Here are three potential target amounts I have worked out along with how much you’d need to save to achieve them. I have assumed an annual withdrawal rate of 3% which should ensure you don’t run out of money in retirement with the lump sum keeping up with inflation and providing an additional return of 3%. This would be achieved by staying invested in a diversified portfolio.
Scenario 1 – equivalent of the UK state pension
Theoretically, the UK state pension – currently £9,110.40 – is enough to live off. In practice, I think most of us would find it hard to survive on £175.20 a week and it’s not something I’m willing to try! And although in the UK a state pension is a universal benefit, it is dependent on having made National Insurance contributions over 35 years, which may not be the case for many expats. Let’s assume though that this is the absolute minimum amount you will need to live off when you stop working and you need to acquire it off your own bat, without relying on a state pension.
Required pension pot: £303,680
Scenario 2 – minimum income standard from the Joseph Rowntree Foundation
The Joseph Rowntree Foundation’s Minimum Income Standard defines a minimum acceptable living standard every year. For 2019 – the latest figures available – the figure was £18,800.
Required pension pot: £626,666
Scenario 3 – comfortable retirement income according to the Pensions and Lifetime Savings Association
The Pensions and Lifetime Savings Association in the UK has an entire website dedicated to retirement living standards which makes interesting reading. They outline three different levels of standard of living for retirement. The top level of £33,000 per year (for a single person) is classed as comfortable and the figure is based on a weekly food shop of £56, holidaying for 3 weeks every year in Europe and £1,000 to £1,500 expenditure on clothing per year. That may be comfortable but it’s hardly luxury living. Nevertheless, this is where the £1million figure comes in…
Required pension pot: £1.1 million
What these figures prove is that £1 million doesn’t go that far in retirement. Yes, it is perfectly possible to retire on a pension pot of £1 million but it may afford you fewer choices and a less lavish lifestyle than you might imagine. If you’re thinking of spending your golden years in a luxury villa on the French Riviera then you’ll need a good deal more than that!
The main point you should take from all this is the importance of starting to save for retirement as early as possible during your working life. If you don’t already have one, you need a concrete financial plan because the capital required for even the most frugal of retirements is surprisingly large and without a plan you will struggle to achieve even that.
It is not easy defining your retirement goals and working out how much you need to save each month to achieve them so if you need some assistance please do get in touch. I have helped hundreds of expatriates get their finances in order so that they feel confident about how much they are saving, how much is left to spend each month and that they will be more than comfortable when the time comes to stop working. Email me on firstname.lastname@example.org.