This is an archived version of this page. The current blog is here
Okay, so at 65 (or whenever) you retire. What happens? You have a certain amount of money, divided into savings, pensions, and the value of your house. The question now is how far does that money take you? Look at the pensions - do you immediately have to convert them to annuities or can you defer them? Can you take a cash lump sum? Generally speaking, I would take as much cash out as possible and live on that rather than buy an annuity. You can look up annuity rates online to estimate what your cash pile or pension funds will buy you - remember to use an index linked annuity in order to stick to the assumption of using today's money - there will still be inflation in the future. Also, you might want to use the rates for say, 5 years younger than your retirement age - life expectancy is likely to increase over time, so unless you're retiring soon, you will probably be fitter than the average person of that age is today. You could also add on the state pension at this point, but who knows what value (in todays money) that will have in 30 years time.
Shocked by the result? I was a bit.
I'd try to defer the annuity for as long as possible - you want to insure yourself against running out of money before you die, but you should try to do that as late as possible - if you die earlier, you win because you didn't give all your money to the annuity company who'll stop paying out as soon as you go. If you die later, at least you'll get a better rate for your money.
So look at when any pensions you have start paying out, and estimate what they'll pay from annuity tables. That's your new income. Assume your expenditure is still what it was before you retired (same over your lifetime remember). Most likely expenditure is bigger than income now. That's okay - you're done saving. Remember to keep compounding the savings you have left, and see what age you get to when the money runs out. You can use the same spreadsheet from part 1
If that age is much older than your life expectancy then you don't have to worry. For the rest of us - that's not the point at which you're thrown onto the street (or your children buy you a special one way flight to Dignitas). That's the point before which you have to move to a smaller house, or look at some kind of equity release. If that age is implausibly young, then you need to think about whether you can save more now, or at least for some extended time before you retire. You can go back and use different figures in the savings column to see the effect of different levels of saving on the amount you have when your retire. Compounding means that even saving a little more now makes a big difference later on. If that doesn't look realistic either, then you do have a problem - but at least it's a quantifiable problem, ie - I need to save x pounds more a month to keep my standard of living until age 80 or whatever. Probably the government will help, or you can look at what happens if you assume you can cut your expenditure levels in retirement. Beware of doing that too much though - remember you're looking at today's money. Look at the income level you set for yourself and ask if you could really live on it. The good thing about a constant level is that you know you can live on what you're living on now - you just don't know how long you can do it for.
Posted by MFreestone at June 1, 2006 02:33 PM