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How much money do I need for my life?

As a financial planner, this is (often literally) the million pound question. For many of us, the idea is that in order to be able to provide for our families, go on the holidays we want to go on, have a comfortable retirement or pay for aged care, we need to earn and save as much as humanly possible. In many ways, this isn’t necessarily wrong.

The truth of the matter is that the more money you earn, invest and save, the greater your options in all stages of life. So whilst working yourself to the bone for every hour in the day is more likely to put you in a better financial position, it may not be necessary in order to live the life you want to live.

Objective clarity

This is why your goals and objectives are the most important part of any financial plan. Before you look into your pension, your budget or your investment strategy, you need to know what you’re trying to achieve. These goals and objectives will be different for people at different stages of life. It may be buying your first home, saving for retirement or ensuring you have enough money to pay for your care in later life.

Understanding what you want life to look like allows you to have a monetary figure to aim for. For certain objectives, like a house purchase, this will be relatively easy. For others, like retirement costs or costs for care, potentially a bit trickier.

Paying for later life

One of the main reasons for this is that it’s hard to get an understanding of how much retirement or care is likely to cost each year, and for how long you’re likely to need it. The further in the future these objectives are, the harder it can be, however there are organisations that have sought to provide some guidance that can be useful.

For retirement planning, I find that the Retirement Living Standards website is a good place to start. It provides an overview of the annual income that a household might need for a minimum, moderate and comfortable retirement, broken down into various different areas of expenditure.

Care home fees can vary even more than retirement expenses, but Age UK provide some great data on average weekly costs in different areas of the country.

From income to lump sum 

Knowing the annual cost for something is only part of the equation. Once you understand how much income you need to meet your objectives, you need to work out how much you need to accumulate in order to meet this need. There are some crude measures, such as the 4% rule. This states that a 4% withdrawal rate from investments is likely to be sustainable for a retiree’s lifespan without the capital reducing significantly in value.

So for a retiree with a £100,000 portfolio, this means that a sustainable level of drawdown might be £4,000 p.a. Again, this is a crude measure and has a huge number of caveats such as the level of risk taken with investments, changes in circumstances or unexpected events (like a certain virus).

Cashflow planning

Realistically, the best way to really plan out your financial future is through cashflow planning or cashflow modelling. For the tech savvy, a detailed spreadsheet can do a decent job, but for those that are seeking professional input and the most robust output, a financial planner can provide a huge amount of value through the use of complex, tailored cashflow and financial modelling software.

These programs allow real clarity around how much you need to work, save and invest in order to meet all of your objectives and live the life you want.

Watch our webinar 

I was recently on a panel with some of my Irwin Mitchell colleagues where we discussed these issues in relation to our recent research with YouGov. We asked more than 4000 adults aged 40 and over about their attitudes towards saving money and planning for retirement, and how these might have changed through the pandemic.

The survey uncovered a range of findings and key indicators of which groups are more likely to prepare for their future. It also showed which groups are more likely to slip through the gaps, including geographical, gender, age and social differences.

Watch the webinar recording where our legal and financial (that’s me!) experts discuss the survey results and provide practical guidance on how you can plan for your retirement here.

You can also download our top tips PDF.

If you’d like to discuss your own later life planning or anything else to do with your investments or personal financial situation, please do get in touch.

The information given and opinions expressed are subject to change and should not be interpreted as investment advice. All data is sourced by IM Asset Management Limited unless otherwise stated. All financial and wealth management services are provided by IM Asset Management Limited which is regulated by the Financial Conduct Authority (FCA), FCA Firm Reference Number 402770.