If you retired today, how much income would you need in order to to have the lifestyle that you want for the rest of your life?
That is not an easy question to answer but it is an important question.
There are any number of ways of working out the answer but a good one is to do a comparison between what you spend your money on now and what you may spend it on post retirement.
We often provide our clients with an expenditure questionnaire.
It can take some time to sit down with this spreadsheet and work your way through it line by line.
You may have to look back through that box, drawer or plastic bag full of bills and receipts and add up what you have spent in the last year on items as diverse as your mortgage costs, housekeeping and food and holidays, but it is a good discipline to do this.
Once you have completed as full a list as possible of the things that you spend money on today, you can then start to ponder on which of those items will still be payable post retirement; which might cost you less and which items might cost you more.
The exercise is to try to be able to answer my first question which I could phrase slightly differently- “how much is enough?”
If you are planning to pay off your mortgage before you retire then that expenditure item might drop off the list entirely.
However, you will have much more time on your hands post retirement to holiday, enjoy your pastimes and hobbies and indeed travel to see family and friends.
So it might be that the cost of travel to work for example is simply replaced by leisure travel. In fact the total travel costs might actually go up post retirement.
If all the members of a household go out to work during the week and you have got into the habit of turning down the heating so that it only warms the house up as you arrive home in the evening then consider how much heating bills might go up by if you are at home all the time during the winter.
So some bills might rise and others might fall. You might spend less on clothes that you needed for work for example and the cash you spend on that daily expensive ‘posh coffee’ might be saved.
But the challenge is to come up with a retirement income requirement that is robust.
Once you have this figure then working out how much you need to accumulate in cash, investments and pension funds becomes easier.
Let me warn you in advance (and I suspect that you already knew this!) for most people there is certainly nothing easy about accumulating sufficient wealth to generate that desired income.
That is why you need to save as much as you can and start as early as you can if you are to have a fighting chance of having enough.
Photo credit: Flickr/kidgrifter
