Actual costs in Retirement

[MerlinsButler]

Hi everyone

I'm currently doing my 6 monthly review for my SIPP. I'm looking at how much I need to aim for to have a decent income when I retire.

A lot of the sites I've looked at seem to take a blunt approach I.e 50% of your current income should be what you aim for.

For background. I'm self employed and have 20 years until (current) state pension age so have been using that as my target retirement date. Though I'd like to retire earlier maybe.

I was wondering if anyone who has retired found the 50% costs target to be accurate. I won't have any housing costs (rent / mortgage) by retirement and to be honest the 50% figure seems high. But I don't want to lower expectations and live in poverty either.

In my experience is easy to underestimate how much you'll need. With regard to housing - you may not have a mortgage or rent to pay, but you will still have council tax and the need to put money aside for repairs, decorating, replacing appliances that break down etc.

You may find your utility bills go up if you're at home more.
I definitely don't buy as many clothes as I did when I was working so that's a saving. Holidays cost as much though
The other thing to think about is that unless you gave a gold plated guaranteed to rise in line with inflation pension you may find yourself falling behind over the years and what you thought was more than enough in your 60's is barely getting by in your 80's. Think about whether you could live comfortably today on the salary you earned 20 years ago & you'll see what I mean.

Thanks @Sandwichgirl I think that is what is concerning me. It's so hard to imagine what I will be spending money on when I'm 60+. Once I stop buying ridiculous amounts of clothes and shoes

I guess we are lucky as live in a low cost Northern area so we are very comfortable at the moment and to be honest 50% of income would still be above average wage. Which makes me feel like the figure that is calculated is just not reflective of what we actually need. I may try working it out on a National average wage which I think is about 30k and see what pension pot figures it comes up with.

Have a look on the pensions forum on Martin Lewis's Moneysavingexpert site. We are almost at retirement (I've just turned 60 and DH is 58 so this is very much on our minds. I read the forum constantly and have learnt so much from it. Lots of people's experiences and some very knowledgeable people on there.

I just did my own calculations looking at what spend now and looking at what we would need in future, adjusted for likely inflation and got a minimum figure. I don't find the 50 percent useful as income can vary, atm we have 2 kids and it really depends what type of lifestyle you are after, are you happy to wear cheap clothes or want expensive ones, happy staying home or want lots of holidays. Also need to factor in if you may need medical care. I also considered husbands and different scenarios there like together married, divorced, he dies early etc not that am expecting to get divorce but best to consider all scenarios. I then reached the minimum and now trying to exceed it. Moneysavingexpert is good. Also added in works on house, ours is thatched which can be a lot of money at once for roof so consider anything unusual as well.

Thanks @Icequeen01 @Silkiecats I will take a look at MoneySavingExpert site.

It is a useful exercise I think. I have run through a number of calculations where you put in the type of lifestyle you want in retirement. Eg Uk break vs European break vs long haul etc and it uses it to calculate a figure. It just seems so unrealistic.

I'm just not sure how I would spend so much per annum.

No kids and not married but co-habiting. So won't have Uni costs etc to think about or house deposits for kids. We are just about to do some major works on house in next 12-18 months - extension / new kitchen / rewire and completely redecorate and then the house is finished so after that it would be ongoing maintenance only.

If anything it has shown me how much money I waste shopping

Don't forget though. Something which you are doing now on your house may need redoing once you are in retirement if you have 20 years until retirement age. We have just replaced our kitchen and bathroom as we are trying to future proof for old age but, as I said previously, I am 60 now.

@Icequeen01 good point. I've kind of factored in any refurbs as part of the tax free lump sum so would have that in savings to use rather than from income.

It's so difficult to think through all the permutations. I'm very goal driven so once I set the figure then I am willing to do what I need to try and reach it. But also I don't want to be aiming for a pot size that is unrealistic if it means I'm missing out on living now. Decisions. Decisions.

I need a time machine!

A slightly depressing view is what happens if you and partner split up? A surprising number of relationships don’t survive retirement. How would the house be split? Would you still mortgage free then?

This gives some basic figures.
www.which.co.uk/money/pensions-and-retirement/starting-to-plan-your-retirement/how-much-will-you-need-to-retire-atu0z9k0lw3p

I did a personalised one and had a minimum figure which was £13k per annum so £26k household income with my husband (also checked if he died or we divorced if that figure would change and found I was covered for both). That was based on looking at our spending over past few years item by item and includes all the bills, food, clothes, things like hairdressers / day to day costs and around £5,000 a year between us on work on the house and a basic holiday. You do need to factor in work on house - kitchens and bathrooms can need changing every 10 years or so, at least the appliances and so will carpets and roofs are expensive. Remember you have 20 years to go then maybe 20 years of retirement. I did mine to 87 as that was life expectancy for a female though about £10k of mine per year is state or final salary if I live longer. Remember over a certain amount a pension is taxable each year.

I'm now aiming to exceed this figure to provide for nicer things and also incase inflation rises more than expected / to have more of an buffer. Things like expensive holidays I would put in this category - they are a nice to have but not essential and also you don't even know what will be possible in retirement - if you are say in ill health going longhaul may not be viable.

£5k is for house then say a further £1k each for a basic holiday

Some financial advisers will talk about a ‘golden decade’ in retirement, which is were people will spend more for the first period of retirement on holidays, recreation, updating their existing home as they have the health and energy to enjoy these things.
After a certain point people’s spending tends to tail off as they lead quieter, less active lives and downsize to more manageable homes (at least until any care/home help costs kick in).

It’s a concept rather than an absolute rule that applies to everyone, but personally I’d first plan a pension to meet basic ongoing living expenses, then work towards a separate pot for ‘fun money’ for early retirement years. For those planning to retire at state pension age, the spendy ‘decade’ might be more like 5 years, if retiring at 55 it might last 15+

I retired 18 months ago and my income has gone down by about 50% net although my gross income has gone down by 2/3. However, am a teacher so my pension is index linked final salary. Don’t forget that when you do retire, you don’t pay National insurance or pension contributions on your pension - this used to come to about £400 a month for me! When I retired, I used some of my lump sum to pay off the mortgage (we downsized a year before I retired) so instantly our outgoings were much lower as the monthly mortgage payments were 1/4 of my net salary. We also paid off 2 loans saving a further 1/8th of net salary. Our household overheads reduced by about another 1/16th. Plus not paying NI and pension contributions saving about 1/6th. This meant in real terms, retirement meant we could reduce our outgoings by around 50% of my net salary. In actual fact, I spend a lot less on ‘stuff’, ie clothes I don’t need, takeaways because I couldn’t be bothered to cook, petrol to get to work, workday lunches and treats just because I felt I deserved them from working so hard 🤣. Plus, when we moved we renovated the house so everything including the roof is less than 2 years old now, so maintenance costs should be minimal.
My dh has also been able to drop a day at work. We’ve not had holidays due to Covid, but do have a budget once we can travel, and now I’m no longer a teacher I can utilise cheaper holidays in term time! I do some part time work, and am able to save all my earnings.
I’ve calculated that when I receive my state pension, my combined teacher and state pensions will equal my net salary just before I retired. My dh doesn’t earn very much, and is younger than me, with only a small private pension but we plan that when I do receive my state pension he will be able to reduce his hours further.

@TheHomeEdit not depressing. Just realistic. All my calculations are based on my income only. If we did split then house would be sold and I'd buy somewhere smaller.

Thanks @Silkiecats I hadn't seen that site. Now I'm conflicted between comfortable or luxurious retirement. It looks like I'd need about £35,000. I will get full state pension if it still exists so that's something.

Need to do some more sums to work out what is achievable pot-wise I think. I recently upped my SIPP contributions as am conscious I don't get employers' contributions but may need to revisit this ahead of next April.

I'm a few years off retirement so have been looking at this recently. It's complicated, even up this close.

I can't see that my spending is going to drop at all when I retire, as our mortgage has been paid off for some time and our work-related costs (clothing, commuting) are minimal. We may downsize, but the reduction in housing costs would be pretty small. I do buy fewer 'things' but I buy better quality. And we expect to be driving and wanting two cars for a good 15 years or more.

In fact spending is more likely to go up with more free time for trips, holidays, hobbies etc.

@BeastOfBODMAS

Some financial advisers will talk about a ‘golden decade’ in retirement, which is were people will spend more for the first period of retirement on holidays, recreation, updating their existing home as they have the health and energy to enjoy these things. After a certain point people’s spending tends to tail off as they lead quieter, less active lives and downsize to more manageable homes (at least until any care/home help costs kick in).

It’s a concept rather than an absolute rule that applies to everyone, but personally I’d first plan a pension to meet basic ongoing living expenses, then work towards a separate pot for ‘fun money’ for early retirement years. For those planning to retire at state pension age, the spendy ‘decade’ might be more like 5 years, if retiring at 55 it might last 15+

Thanks @BeastOfBODMAS this is exactly what I needed. I need to have a fun pot. I am so conscious that I want to be able to do "stuff" like travel, learn etc and am a bit paranoid about not being able to.

Having two imaginary pots as it were may be an easier calculation. Cover my basics / outgoings and then anything extra is for my fun pot.

Thanks @Soontobe60 it's useful
To hear from someone who has recently retired.

Yes to no longer paying in to a pension. I pay a lot as self employed so that will make a big difference to my outgoings. So need to factor that in.

@Purplewithred yes. I can see that your outgoings won't reduce substantially. I am in a similar position. No mortgage / debts and with 20 years to go I have no idea how to assess what I will need then.

Because we live up North - living costs are pretty low so we don't have huge outgoings now. But I do want to spend more time travelling etc.

I think I will need to pick two figures for my imaginary pot. One essential and one luxury and see how it goes. As I get nearer to retiring I guess I'll have a better idea on my costs.

I think a lot of the problem is that people don't realise what size pot gives them what size income. I believe (but happy to be told I'm wrong) you need to have near enough £1 million in your pot to generate a pension of around £30,000 which is beyond most people's reach.

I always work out pension pot needed as number of years from when want to retire /live off pension to average life expectancy for female / male so if planning to retire at 60 and female that 60 to 87 you need to cover at £30k a year if you want that amount. Though this needs to be after tax so if you are paying in gross you will need to account for tax you will pay when receive. You can take any state pension entitlement off that - you can get a current estimate on the govt website though they do push the starting age up for claiming sometimes. Not sure if this is the official way but its how I do it.

I have a basic needs pot which is £13k a year to cover 60 to 87 and an excess amount on my Excel spreadsheet which is for fun things like holidays. In my case it will be a joint amount so equivalent from my husband as well so £26k household basic needs. If you are not married I would definitely do as a single person. And if married you do need to check if I got divorced situation.

We also have no mortgage and I would expect our expenditure to be similar to now plus inflation less some of the costs we spend on the children though not expecting child costs to go completely and sometimes its hard to know exactly how much the children cost.

@Icequeen01 blimey! That is a huge pot of money. Looks like I'll be downsizing my expectations.

@Silkiecats thank you. That is really helpful.

Which have a helpful drawdown calculator www.which.co.uk/money/pensions-and-retirement/pensions-retirement-calculators/income-drawdown-calculator-a5pj57u5134k though of course that depends on whether you are happy to take the risk of using drawdown rather than having any guaranteed income source.

Silkiecats - that's interesting. It does sound potentially a bit pessimistic in that it sounds as if you are assuming that your investment return will equal inflation? Hopefully on average it should be more than that. On the other hand it sounds a tad risky to only plan to average life expectancy given that half of people will live longer!

Thanks for the link Mia Yes mine calculations come out more pessimistic than Which's worst case ones well at 4% inflation at least. I've not added in investment returns over inflation as I wanted to be cautious and was using the figure for my essential money calculation but it is interesting to see how it grows. Though I never know what inflation figure (obviously 2% current target) or what returns on investment. Atm as well I've had to stop work with about 20 years to go to state retirement age though I think I have enough saved but I need to reallocate money. Up until Feb I had the money in property but now I have to decide what to do with it and how much I will need before retirement age as well.

Re the life expectancy agree its something that needs to be considered. I wasn't too concerned for me as almost all people in my family have lived less than average and also in those years I will have state pension plus I have a £3k per annum final salary pension so the difference between that and my essential figure isn't that big. I did look up on ONS age predictions and it gives 87 for me but says 1 in 4 chance of 94 and 1 in 10 chance of 99.

I looked into annuities but the rates seemed very poor but its something I will look at again later but I would need to live to 100 with annuity to make it cost effective at current rates.

I do need to refine things though. I also miss the days where you could just put money in the bank and get 6% with no risk.

Thanks for the link @Mia85. I am veering towards having 2 goals. One for essentials. So state pension plus c2/3k from old final salary pension and some of my pot. And then a figure for fun / extras. Now just got to work out what that should be.

I think it is the fact that I have no idea what inflation will be in 20 years that is throwing me off. It's a nightmare. Lol.

Plus I'm trying to imagine myself 20 years older and what I will want to do

Money Saving Expert has a Pensions Forum with two useful long running threads. One is called something like 'the number' where people discuss how much they'll need in retirement. The other is those newly retired who are on a thread called 'digging up those squirrelled nuts'. This one shows what people are spending on/whether they needed to adjust etc. Both very interesting reads but be advised that there are some very good planners on there and it can make you feel a bit financially inadequate!
There's another newer thread called something like 'for those with not many nuts to dig up' about people who have smaller retirement incomes.