The Right Thinking
When people think about planning for retirement, the first question they often ask is, "How much money have I got?" It's a sensible question, but it isn't the most important one. A much better question is, "How much money will I need to spend each month?"
The amount you spend in retirement is what will determine the lifestyle you can enjoy. Without knowing your expected expenditure, it's almost impossible to know whether you're on track for the retirement you want.
Think Of It Like Planning A Holiday
Before you decide how much money to take, you first need to know what sort of holiday you want. A camping trip costs a lot less than a luxury cruise. Retirement works in exactly the same way.
Some people dream of travelling the world. Others want to spend time gardening, looking after grandchildren or enjoying afternoons in the local café. There isn't a right or wrong retirement. The important thing is understanding what yours looks like and how much it will cost.
Nail Your Spending
This is why establishing your expenditure is one of the most valuable exercises you can do.
Many people underestimate what they’ll spend once they stop working. They assume costs will fall because they no longer have to commute, buy work clothes or pay for cakes on their birthday! While some expenses do disappear, others often increase.
You may spend more on holidays, hobbies, home improvements, eating out or helping your family. You also have more free time, and having more free time often means spending more money.
Survive Or Live?
Retirement isn't about surviving. It's about living. That's why focusing on your expenditure rather than simply your savings makes so much sense. Once you know how much you expect to spend, everything else becomes much clearer.
You'll know how much income you'll need each month. You'll know whether your private pensions, state pension and investments are likely to provide enough.s.
If there's a shortfall, you'll know while there's still time to do something about it. Perhaps you need to save a little more, perhaps work for another year or two, perhaps adjust your retirement plans slightly.
Making these decisions before retirement is far easier than discovering you've run out of money after you've stopped working.
Know Where You Stand
Many people are surprised to discover they actually need less money than they thought. Others realise they'll need more than expected because of the lifestyle they want. Neither answer is good or bad. The important thing is knowing.
A retirement plan based on guesswork is unlikely to give you confidence. A retirement plan based on real spending figures is much more reliable.
One useful exercise is to split your spending into 3 simple groups:
The first is essential spending. This includes things like household bills, food, insurance and basic living costs.
The second is lifestyle spending. This covers holidays, meals out, hobbies, days out and the enjoyable things that make retirement rewarding.
The third is unexpected spending. Cars need replacing, houses need maintenance and life always has a few surprises.
When you understand all three areas, you begin to build a much clearer picture of your retirement. It also helps reduce worry.
Clarity
Many people approaching retirement are anxious because they don't know whether they'll have enough. In reality, they often haven't worked out what "enough" actually means.
Once expenditure has been calculated, uncertainty is replaced with facts. That gives people confidence to make informed decisions instead of relying on assumptions.
This is one of the biggest benefits of proper financial planning. It's not just about investments or pensions.
It's about understanding the life you want to live and making sure your money supports it.
Money Is Simply A Tool
Your expenditure tells you how much of that tool you'll need. Without knowing your spending, even a large pension pot doesn't tell you very much.
Equally, a pension that looks modest may be more than enough if your spending needs are lower than expected.
The numbers only make sense once they're compared against your expected lifestyle.
So, before you spend hours checking pension values or investment performance, spend some time thinking about your future spending instead. Ask yourself some simple questions:
How often do you want to travel?
Will you change your car regularly?
Do you want to help your children or grandchildren financially?
Will you move home?
How often would you like to eat out?
The answers to these questions help create the retirement you want, and they also help calculate what it will cost.
Retirement planning isn't really about building the biggest pension. It's about creating the lifestyle you want and making sure your money can support it for the rest of your life.
And that all starts with one simple question… What do you think your retirement will cost?
I hope you found this useful but please get in touch with me if you need me…