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How much is enough to live on in retirement?

Lloyd Fernley

Joseph Lamb

Deciding how much money you need to live on in retirement can be tricky. Actually stating what is ‘enough’ is difficult as circumstances change over time.

Starting with the least amount is where to begin, which usually constitutes all necessary bills to be paid for i.e. housing, food, utilities, and clothes. Thereafter there will be expenses for socialising, travel, goods, and services.

A recent study showed that for a single person, a weekly income of £270 is needed, and for a pensioner couple it is £348.This equates to an annual range of approximately £14,000 to £18,000.To provide £14,000 from a fund with an assumed return of 5% per annum would mean a pension pot of roughly £280,000 is required. Most people don’t have that as the UK average is nearer £50,000 to £60,000. This means that the required income will need to come from other sources such as State Pension (£151.25/week for retirees from April 2016) and other assets such as savings.

If we again assume that the State Pension will provide £7,000, the rest of the £14,000 will need to come from other assets. Let’s say that the £50,000 pension provides £2,500 per annum (5% return) we still need £4,500. If this were to be taken from the pension pot as further drawdown, it would mean that the pot would need to grow at 14% per year just to stand still!

” A lot of people will need more than the £14,000 per year in retirement, and if you rely on the State to make up the shortfall, then you are in for a rude awakening. “

Other things also need to be considered such as ensuring that the income doesn’t dry up. This may lead to a decision to purchase an annuity.

Is the growth /return rate sustainable? What if the fund is invested in the wrong sector or product?

If you have an investment property, what happens if there is an extended void period for the rental? Also what if you need to sell the property for other reasons. This would create a shortfall in the rental and therefore income.

Tax treatment of other personal assets may affect the net income you will receive. Budgeting is therefore an important aspect to retirement. When someone first retires they are more likely to do more or take part in activities as they are younger and will have the capacity to do so as opposed to when they reach their 80’s. This will have an impact on how much income you need throughout retirement.

A lot of people will need more than the £14,000 per year in retirement, and if you rely on the State to make up the shortfall, then you are in for a rude awakening. The recent pension reforms that came into effect in April 2015 was a clear message from the Government that people need to start taking ownership and sharing in their pension and retirement provision.

What income is needed during retirement will be forever fluid due to changing circumstances, and health of the retiree. Perhaps it would be prudent to start thinking about how to budget for the desired retirement income way, way, way before you hang up your boots!!

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