Why ‘enough’ might be less than you think
Recently, we met with a client who had decided to retire and was in the process of selling his business. He’d had his company valued at £6 million and had received an offer of £4 million for the business.
Like many business owners, our client was completely fixated on achieving the full valuation for his company. As that was the figure he’d been advised, that was the sale price he wanted to achieve. Consequently, he’d turned down the bid.
But what if the offer of £4 million was enough? What if it would allow him to sell up and move onto the next stage of his life? What if, with careful planning, it would provide him with the standard of living that he desired in his retirement?
Sometimes, the amount that we think is ‘enough’ is nothing of the sort.
Thinking about the amount you need for your retirement
How much money do you need for the retirement you want? Of course, there’s no simple answer to this question. Everyone is different, and everyone has their own idea of how they would like to spend their post-work years.
As Alistair McQueen, Head of Savings at Aviva, says: “There is no universal answer to the question ‘how much is enough?’”
There are lots of factors that affect how much money you think is ‘enough’ to retire, including:
- What age you want to stop working
- Your health
- Whether you have guaranteed income from pensions
- Whether you have other income – for example, investment or rental income
- When you want to start drawing your pension income
- Your assets other than your pension
- What standard of living you want to achieve
- Whether you’re likely to inherit any money in the future
- Your tax position.
Discussing all these factors with an expert can help you to work out what your ‘enough’ is. Our boutique wealth planners can help you to establish your goal and put plans in place to achieve it.
Establishing how much is ‘enough’
“We all know we need to save for retirement, but few of us know how much we might need to live on or whether we are on track to hit that target,” say the Pensions and Lifetime Savings Association. Just as important is understanding what rate of return you then need to achieve to secure all of your goals throughout your lifetime.
Establishing the amount you want to have saved at the point you retire is a good way of focusing on your goal. Suddenly, you have a specific ambition to work towards.
Having this conversation with the client we mentioned above opened his eyes to the fact that his ‘enough’ was not his accountant’s value of his company, but below the offer he’d received for the business.
Firmly establishing your retirement plans and what money you need to achieve these might result in a figure that surprises you. Instead of arbitrary figures that you may have read in newspaper articles, sitting down with an expert can focus on your own specific needs.
A variety of “rules of thumb“ exist to provide guidance in this regard. For example the Pensions Commission says that people should aim for retirement income that’s about 2/3 of the pre-retirement income to maintain their standard of living.
General calculators aiming to answer the question of “how much is enough?“ exist, such as the “multiply by 25 rule“ (i.e. you need to have saved 25 times your target retirement income) or the “savings factor rule” (eg aim to have saved four times your salary at age 45 or eight times your salary at age 60). Frankly such rules at best oversimplify, at worst can be downright misleading. The truth of the matter is that for each individual family there will exist a unique set of circumstances, aspirations and expectations. Moreover these will evolve over time and quite possibly unexpectedly change.
Our approach for those families interested in engaging in a comprehensive planning process is to have an in-depth dialogue to really understand what their objectives and aspirations may be over time and to be realistic in agreeing assumptions with regards income needs, inflation, rates of return, risk and so on.
We can then engage in utilising our “HFMC Money MapTM” process, which many of our clients have already experienced, engaging in a tailor-made process that can be updated year by year to help ensure each family is on track to achieving their lifetime financial goals.
Should you feel you could benefit from advice in really working out how much is “enough“ please contact your usual HFMC Wealth private client director or adviser.