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How Much Is Enough?

Updated: Aug 18, 2022

When it comes to retirement planning, the most important step is to decide how much is enough. In other words: how much money will you need to live on in retirement?

Once you have decided this, everything else starts to fall into place: you know how big your total pension pot needs to be and you now how soon you can give up work.

Because this is such a key element of your retirement plan, it’s well worth putting a lot of careful thought into it and, as a Reeves client, we will help you to do that. We’ll sit down with you and go over your monthly outgoings, taking into account those that will change once you give up work – or even cease altogether – and new expenses you might want to incur in retirement, such as holidays or new hobbies. We have a lot of experience in this and will be able to point out areas you may have forgotten, or have never taken account of.

Once you have arrived at a monthly expenditure figure, you know what your monthly income needs to be, but it’s important to remember that that figure is what you need after paying any income tax.

It would be possible to take this monthly figure, multiply it by 12 and then multiply it again by the number of years you hope and expect to live. That’s possible, but not sensible.

The truth is that a person’s spending requirements change as their retirement progresses. In the earlier years you will typically want to enjoy your newfound leisure: taking your dream holidays; visiting relatives in Australia; buying a classic British motorbike; learning to play the piano; or just on going out and having a good time.

However, as the years pass, spending requirements, in most cases, will lessen. Your children will be grown up and independent, you will take fewer foreign holidays, have less interest in going out or buying new clothes and you’ll drive less. You could say, you will be more content.

One Reeves client, Antony Evans (name changed), came to see us when he was 62 to discuss his retirement plans. Together, we calculated that initially, he would need an annual income of £30,000, after tax. This would allow him to fulfil some long held travelling ambitions, such as a tour of South America and to play some of the world’s best golf courses.

When he reached the age of 66, he would qualify for the state pension of £9,000 a year, so the annual withdrawal on his private pension pot would be reduced to £21,000 a year. He would continue to draw this until he reached 75, by which time he believed he would have seen all those parts of the world he had wanted to and he would be happy to confine his golfing to UK courses. Then, he would only need £22,000 after tax, so, with the state pension, he would have to draw £13,000 from his pension pot each year.

Five years later, aged 80, he accepts that he will probably have given up golf altogether and would only be going on holiday in the UK, so his income requirement will be just £15,000 a year, which, after the state pension, only calls for £6,000 a year from his pension pot.

Once we had had this conversation with Antony and ran some projections for him, he realised that, with his pension savings of £450,000, he would be able to retire immediately at the age of 62, two years earlier than he had hoped – a pleasant surprise.

Every individual is different and so are their spending requirements. We recognise that at Reeves and we draw up a bespoke plan with and for each of our clients. As part of our service, for every client, we conduct a retirement planning review once a year and twice a year if retired, where we provide projections on how much money they need and how they can afford it.

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This article is for information only and should not be construed as advice or a recommendation. The investment strategies mentioned are examples only and may not be suitable for your particular: circumstances, tax position or objectives. Please seek independent financial advice before taking any action.

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