A] Prelude*
* For more information about pension and investments, feel free to visit our dedicated webpages:
https://expatpensionholland.nl/global-pillars-systems
https://expatpensionholland.nl/global-investments-risks-0
As individuals approach retirement, they frequently hold misconceptions about the stages they will encounter during this significant phase of their lives. Retirees often assume (and no doubt hope) that retirement will be a continuous phase of leisure and relaxation.
However, the reality is often more nuanced. While some retirees do indeed enjoy excellent long-term health and financial stability, others might face health challenges or unexpected financial setbacks.
Retirement planning requires complex financial calculations and understanding the dynamic interplay between health, finances and personal fulfilment. Evaluating savings, investments, and pension income is of course crucial but so is understanding the impact of inflation, tax hikes on savings’ interest, rising healthcare costs and unexpected expenses. Which will all ensure financial security throughout retirement.
By dispelling misconceptions and embracing the evolving nature of retirement while planning for it, individuals can navigate this phase with greater confidence and often with better results.
B] Three stages
For those tasked with advising clients on planning for their retirement, it’s worth remembering that there are in fact three distinct stages of retirement and each of those stages has different financial implications. These three phases – the ‘go-go’ years, the ‘slo-go’ years, and the ‘no-go’ years.
While individual experiences may vary, the general trend involves higher spending during the first stage of retirement, a dip in spending during the middle years, and a return to high spending during the no-go years – a trend often referred to as ‘the retirement smile.’
In the ‘go-go’ years, retirees tend to spend more. This phase is characterized by relative youth, better health, and increased activity. As people embrace travel, hobbies, and other interests they didn’t have time for while working, their spending naturally rises.
In the ‘slo-go’ years, activity decreases as retirees settle into a routine. The first flush of freedom fades, and so too does the level of spending. Individuals are in the equivalent of a holding pattern.
In the latter stage of retirement, spending once again increases significantly as the cost of healthcare take centre stage. During the ‘no-go’ years, typically beginning in the late 70s or early 80s, individuals begin to slow, illnesses and ailments become more apparent, and the commensurate healthcare costs begin to accelerate.
Assisted living facilities, in-home nursing care, and long-term care facilities can all contribute to rising costs, especially since healthcare and senior assistance expenses have outpaced general inflation.
C] Cost of retirement
Inflation not only affects the world today but also has implications for future affordability and even pension savings are susceptible to these fluctuations.
When the value of a pension remains unchanged, it gradually erodes purchasing power over time. As a result, pension savings may ultimately fall short of anticipated expectations, and a sum decided 40-years earlier as being sufficient to keep someone in their dotage may fall well short of what is actually needed.
The 25x rule provides a practical way to estimate the necessary retirement savings. Essentially, it involves multiplying expected annual retirement income from personal savings by a factor of 25. In order to do so, clients need to determine their desired annual retirement income, while also accounting for other income sources.
The figure they arrive at needs to be multiplied by 25, as this figure in general represents the total savings needed to support a retirement lifestyle. For instance, if someone plans to spend £ 25,000 per year in retirement and receives £ 10,000 in other income, they will need to save £ 15,000 annually (£25,000 – £10,000). Applying the 25x rule, their target retirement savings would therefore be £375,000 (£15,000 × 25).
Consequently, the 50:70 rule is a quick estimate of how much someone could spend during their retirement. It suggests that clients should aim for an annual income that is between 50% and 70% of their working income.
A full-time worker in the UK currently earns on average around £ 35,404, which suggests that a retiree should achieve at the top end (70%) of £ 24,782.80 to spend in their pension per year. However, with inflation rates at 4.2% percent (as of May 2024), this amount will only be worth £ 20,369 in five years’ time and a mere £ 16,742 by 2034, according to Wesleyan.
It is worth nothing that The Telegraph have reported, according to a recent study, a comfortable retirement is now at a much higher figure of £ 43,000 a year as rising food and energy bills push up the cost of living.
Therefore, and evidently so, retirees are facing a significant erosion of their retirement savings. And since the value of the state pension has only increased by approximately 50% in the last ten years (in April 2024, the average state pension for a single person averaged £ 8,814.00, while in April 2014, it was £ 5,881.20), retirees must look to other means of financial support.
The biggest single cost anyone is likely to face is the cost of care home provision. Costs of course vary enormously from one home to the next and across regions, but the total costs are alarming and probably much more than your clients expect.
According to CareHome.co.uk the monthly average cost of residential care is £ 4,640, while nursing care in a care home costs on average £ 5,640. There are also hidden costs and fees. Often, the single biggest cost of living in a retirement home or retirement village will be the monthly management fee or service charge which includes 24/7 support, cleaning and communal facilities.
There are some financial advantages to getting old including an entitlement to free NHS prescriptions, complimentary eye tests, dental care, free or discounted bus passes (availability varies by council), free TV licenses, assistance with bills, council tax reductions, and cold weather payments. These can all effectively reduce the cost of retirement but are really meant to help individuals get by, rather than contributing to a life of leisure.
D] Finally
Retirement is a journey marked by various highs and lows. Therefore, it is crucial for those approaching retirement to have a robust financial plan in place, ensuring they can smoothly navigate all three phases of retirement.
Professionals can provide personalized guidance to address individual requirements. For example, a financial advisor can help identify the optimal private pension product and create a comprehensive financial overview and a customized roadmap.
Ultimately, this approach reduces estate planning stress, enabling individuals to optimize their retirement benefits.
Individuals approaching retirement could also explore the concept of a living inheritance. This option allows them to transfer their wealth and assets while they are still alive. A consideration that may be increasingly relevant as younger generations and their families grapple with the escalating cost of living.
However, ensuring financial security throughout one’s life is crucial when considering estate distribution. Giving away too much too early, without a true understanding of an individual’s financial needs as they enter the latter stages of their lives, is a common mistake and one to be avoided.