The Planning Team
17th February, 2023
Blog, DB News
How much is enough…?
For future planning this is probably the most important question we can ask of ourselves, though it’s one that’s also a challenge to answer. To start, you need to understand how much your life costs you now, and assuming you want your current lifestyle to continue, then make an assumption for inflation to arrive at a cost for running your life over the years ahead. There’s no right or wrong here of course – we are all different. One person’s definition of a nice holiday will differ from another’s. Some people have expensive interests, such as nice cars, whilst others enjoy the simpler things in life. Either way, once you understand the life you want to live and the respective cost of that life, then you’ve solved stage 1.
Stage 2 is to consider the financial legacy you would like to leave. In that respect it’s good to think about if and who you want to leave things too, and how much. For example, A 60-year-old with £1m saved, combined with the objective to spend it all before they leave this planet, will require a different target sum to someone the same age who wants to leave at least £750k to their beneficiaries.
So, the key stages are how much you want to spend, and how much you would like to leave to others, and add an inflation calculation for good measure. Don’t worry, we’re not copping out of giving an answer to the question. Here’s a couple of reasonable estimations you can make…
A good starting point is to build a bucket of 20x your desired annual expenditure level. So, if you require £50k per annum, aim for £1m across pensions and investments. The rationale is that over the longer term, you should be able to achieve a 5% investment return without taking a huge amount of risk, so if your pot grows by £50k, and you spend £50k, your initial £1m should stay reasonably consistent across time (albeit slowly eroding with inflation). Accounting for inflation, and perhaps with the additional objective to leave a larger legacy to your beneficiaries, would mean revising your target up to nearer 25x. In the case of £50k a year, that’s a £1.25m pot, which would give you more of a buffer.
With enough thought, it is a question you can answer, and of course we are here to help with our financial forecasting tool kit and vast experience of how spending levels change through the different stages of retirement. Assuming robust health, people do spend less in the second stage of retirement – two cars often move to one, and holidays become shorter in distance. Factoring in your overall personal balance sheet (not just your liquid assets and pensions) is also key to formulating the best overall strategy to achieve your objective.
You should also bear in mind that during your journey you’ll run into an unexpected or unplanned expenditure, such as essential repairs to your home or a special holiday or event you just couldn’t anticipate when starting out on your journey.
So it’s never quite as simple as targeting 20x or 25x your desired spending level, though it gives you a good start. Once you’ve worked through the key factors above and come up with an overall target, you will always fit into one of the following three categories:
- Don’t have enough to meet your objectives.
- Have just enough to meet your objectives.
- Have more than enough to meet your objectives.
Camp 3 is a lovely position to be in, with managing tax efficiency and risk the main focus of an ongoing plan. Likewise, camp 2 is great, providing your plan is efficiently formulated to ensure there is little danger of slipping into camp 1. Camp 1 requires more thought, perhaps a change of strategy, to save more now, change your risk profile, or push your time horizon back… perhaps even a combination. Either way it’s important to know where you stand. Our aim is to help you identify where you are, implement a plan, and deliver that plan to provide the best way to reach your destination.
Finally, just a note to say the previously scheduled abrdn platform upgrade didn’t go ahead as planned.
This will now take place from the evening of Thursday 16 February to Tuesday 21 February and will be closed for access during this period.
If you can’t log on over that period, don’t worry – everything will remain in its usual place and we will be at hand to answer any questions. The system will be back up to speed from 22nd February with improved functionality.
Have a great weekend everyone.