It’s one of those big life questions, isn’t it? How much do I need to retire?
And at first glance it the thought of trying to figure it out can feel really daunting.
I’m sure if you stuck the question into Google, you’d find that it’s one of the top searches for people thinking about their financial future. “How much do I need to retire?”
Because let’s face it, even if you really love what you do, you’re still going to want to take things a little bit easier at some point. It might not look like retirement in the traditional sense – where you completely stop working one day and that’s it – but having a pot of money for your later years is something I think most people aspire to.
But how big does YOUR pot need to be? How on earth do you figure it out? Well – there are three key things that we need to do, to get clear about how much money you’ll need for your retirement.
So if NOW is the time for you to start working out how much you’ll need to retire, and not be worrying about money all the time, read on to find out exactly what you need to know so that you can retire in comfort . We’re going to look at them in turn, so you can start to create your individual retirement plan!
Stage 1: Spending
This first stage can often feel a bit ‘how long is a piece of string’, so it helps to start breaking it down.
Think about the life and lifestyle you might want, in your later years.
How much will you want to spend each month or each year in retirement?
Where will you live? What do your bills look like? Will you have repaid your mortgage by then?
What about if you NEED to retire, due to ill-health or the need to care for your spouse in their old age?
What do you want to do when not at work? If you want to pootle around your garden, growing vegetables and raising chickens, that’s a very different lifestyle (and budget) compared to travelling the world or going to West End shows and restaurants at the weekends, or fulfilling a lifelong ambition that’s going to need cash.
And will your spending be the same when you’re 60 to 65, as it is when you’re 65 to 75? and then what about into your long and really old age? It might go down; it might increase, if you start to need help around the house or health care.
I know these are big questions and that right now, you might not have a clue what you want in the future or find it hard to picture clearly. Of course your plans and ideas may well evolve and change.
But it’s impossible to start making sure you have enough money for your retirement years, without getting at least slightly clear on these things!
Stage 2: Assess Where You Are Now
The next stage is to then spend some time looking at the position you’re in right now.
What have you already got in place?
This might include looking at your state pension forecast and existing pensions schemes. How much are they likely to give you, when the time comes?
Will you have any other income as you move into retirement? From your business, other assets like property, or any other income streams?
Will you have any other pots of cash you can access?
And the big question… is that going to be enough to give you the income you’ve identified in stage 1?
If not, don’t panic!
This is why retirement planning can feel completely overwhelming and why so many people bury their heads in the sand, because the gap feels massive. Especially if you don’t have a pension in place yet (which, by the way, so many business owners don’t).
I’ve talked in other blogs about your house being your pension, which I hear a lot, and of course it’s brilliant to have that asset. But will you really want to move, once you reach that stage in life? With all the hassle and cost and energy moving takes, leaving your memories and potentially your support network behind? Will you want to downsize to free up cash to live on, when your family may well be expanding with new spouses and grandkids?
Obviously if you want to sell up and embark on a new adventure, that’s great! It’s just that if you rely on that and have to sell your house, when you really don’t want to, it’s not a position that any of us want to find ourselves in (especially if you need to retire through ill-health)
All of which takes us to:
Stage 3: Create A Pot Of Money To Fill The Gap!
By which I mean effectively creating a pot (or pots) of savings that you can use in the future, to live the way you actually want in your later years.
In days gone by, people always thought that you needed a big lump sum of money on the day you retired – because people used to use their pension or retirement savings to buy an annuity, which was a guaranteed income for life.
The idea was that during your working life, month after month and year after year, you’d save money away into a pension type plan. When you got to retirement, you’d then exchange that pot of £100,000 or £200,000 or £500,000 for a guaranteed income for life.
It was designed to replicate those final salary pensions which are now pretty much long gone, except for NHS staff, teachers and civil service type schemes.
But retirement doesn’t look like that these days, not for most people and certainly not for business owners.
On the whole, we want more opportunities to enjoy life; to travel and to experience things in a way that wasn’t typical for previous generations. Although many people retire earlier now than in days gone by, many of us now choose to work part time or have some sort of flexibility, like a phased retirement. This is even more common in the business owner community, especially with the flexibility that online business now gives us.
After all, you’ve found the thing you love. You enjoy what you do and you’ve spent years getting good at it. Sure, you might want to just keep a client or two, or a part of your business that lights you up the most. You might want to start mentoring young people or finally write that book.
You’re not just going to suddenly hang your boots up age 67, are you?
But you’re STILL going to need a pot of money!
You might not need the money all at once, because you’re not typically going to be buying an annuity with it. You’ll be dipping into it as and when, so it’s not necessarily essential that you have every penny you’ll need to retire ready at age 67. Which is reassuring if you haven’t started saving for your retirement yet, because you don’t have to have everything worked out in one go.
There are various online calculators and tools you can use to figure out how much money you might need for retirement, depending on the type of lifestyle you intend to have.
Loads of things will come into play and it will be completely individual for you, but it’s definitely fair to say that we can no longer talk about you having a pot worth 25x your current salary or any other fixed or arbitrary amount.
If you want to work out what your pension gap is, so you can start to put everything in place now for your future with my Pension Masterclass, which you can find HERE
It’s currently only £72.39 but if you act quickly the link will offer at half price, so just £36.19! (yes, really!). Step-by-step, I’ll walk you through how to work what you’re going to need; what you’ve got in place already and what your gap is in my usual, easy to follow process.
Because honestly – whether you’ve got cash squirreled away or absolutely nothing in place yet – the sooner you start, the longer your money has to grow and the richer you’ll be when the time comes that you want to slow down!
Until next time,
Claire