THERE’S an old saying in the financial world: ‘failing to plan is planning to fail.’ I think it might have been an engineer who came up with that originally.
Any engineer will tell you that the key to managing a successful project is good research and making a plan in advance. It’s what they call in industry ‘project management.’
In terms of planning our personal finances, this involves making ourselves aware of the income we would like to have in retirement, to provide a reasonable and comfortable lifestyle. Since retirement planning is a long-term game, the sooner this is done, and the more thoroughly it is done, the better.
A new survey report “The Cost of Tomorrow” by Tilney Bestinvest provides vital information on what retirement will cost – and it’s something of a wake-up call for many people.
In fact, they found that most people yet to retire underestimate the amount they will actually need in later life by almost £100,000.
Bestinvest have calculated that a typical household will spend £420,000 in retirement, in today’s prices.They can expect to spend £26,500 every year until they reach 75, dropping to just below £16,000 per year after that.
Assuming a proportion of retirees’ income is covered by the state pension, an average retired household will still need a further £14,100 to maintain their spending levels.
Another interesting perspective they provide is that, by the age of 50, we have only spent half of what we should expect to spend in our life. Given that a substantial portion of our remaining years will hopefully be in retirement, without a working wage, then the importance of planning for retirement income is clear.
In fact, with increasing longevity, we can now expect to spend nearly a third of our life as a retired person.
And at the risk of stating the obvious: when we are no longer working, most of us would like to be able to enjoy our leisure time. This requires funding!
Bestinvest found that people under the age of 30 see their spending dominated by housing costs, while leisure and holidays makes up just one fifth of spending. In contrast, those aged 65-74 spend a quarter of their total spending on leisure.
The good news is that as housing costs diminish with age, a typical retired household can expect to spend £99,500 on leisure in retirement, £41,000 of which is on holidays. Does this sound like a lot? Considering we hope for one or two holidays a year for 25 years or more, it all soon adds up.
Bestinvest estimate that the average household can expect to spend £1.9 million over a lifetime. As mentioned above, half of that comes after the age of 50.
Considering all of the above, Bestinvest conclude that financial planning is essential to achieve a comfortable retirement. We need to think about the future and we can’t leave it too late.
We need to ensure we have suitable savings and investments in place early enough in life to generate a sufficient pot of money - after tax - to support spending levels in retirement, to support our families and, perhaps, to leave an inheritance.
You don’t need to be a qualified engineer, to see that retirement planning can’t be left to chance.
From the beginning, a little project management is essential!
:: Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 71886005 . Further information on Facebook at Kennedy Independent Financial Advice Ltd
