Speaking with a new client last week, he told me that his colleague’s financial advisor said she needed €1 million in her pension at retirement. He wanted to know if he needed €1 million as well? I had no idea. He was a new client and I didn’t know enough about him and what he wanted to do in life. I also have no idea where this advisor came up with €1 million. It’s a nice round number though. Was there a detailed analysis in coming up with this amount or did he pick it out of the sky?
When we plan for our retirement, we like to aim for a number. When we reach it, we have achieved financial independence/ we can retire/ we are rich. The thing is, there is no number. It’s a myth. Something we can aim for. But like life, you finances are made up of loads of different moving parts.
There was a time when people had their work pension and that was it. They bought an annuity at retirement and lived on that income. In that sense, having a certain amount in your pension was a target. But it is not like that anymore. Now we have many different sources of income:
These will come on board at different times and some, like the State pension is not an asset that you own, it is an income you receive every week. Rental income can provide you with a regular income but behind that is an illiquid asset that you own. Sell it and you have a big injection of cash that you can spend on whatever you want. Keep the property and the rental income will drip into your bank account as long as you are renting out the property. How do you value this illiquid asset when calculating your number? By the renal income or the value of the property?
Likewise, our expenditures change over our lifetimes too. If you retire young enough and still have your health, you will spend money. Your ability to travel and try out new experiences is not limited to how many days annual leave you have, so you may actually end up spending more than you previously did when working. The person who wants to do this travel flying first class and staying in high end hotels will obviously need more money that someone who doesn’t.
You may also want to help out your own children financially. One in four first time buyers get a gift from their parents for some of the deposit.
As you age, it is likely that your spending on things like travel will decrease. You may stop driving too. But things like medical care may increase. If you need to go to a care home, your last few years may end up to be the most expensive. Or you may be able to stay in your own home right until the end.
And that is the big question, when is the end? It would be easy to plan for things if we knew but we don’t. My own granny lived to 100 years of age. That is a lot of living to pay for and there was a lot of expense in later years on home help and eventually care home.
Instead of being fixated on a number, concentrate on good habits. Spend less than you earn and save the rest. Use capital markets to grow your wealth and don’t have a lifestyle that you cannot afford in the long term.
Steven Barrett
07 November 2022