Retirement Cashflow Crisis!

Almost half of UK retirees fear they will eventually run out of money, with many relying on receiving an inheritance or downsizing their main residence to top up their pensions.

A study revealed that a quarter of retirees plan to top up their retirement fund with an inheritance from a family member or friend, while a third will downsize to a smaller home to free up some cash. With an estimated 12.5 million people over the age of 65 in the UK, this suggests around three million retirees are relying on inheritance and more than four million retirees are planning to downsize to cover costs.

I see two problems with this. Firstly, life expectancies remain high at 84 for men and 87 for women. Rising care costs, especially in the last 3 years of life, may leave not enough inheritance, if any at all, especially with the new social care changes (see here).

Secondly, downsizing is easy in theory, sell for £X, buy for £Z. The reality is few are willing to downsize sufficiently, due to the perceived high prices of smaller properties compared to what you have now and many aren’t prepared to take that decision. They say moving home is one of the most stressful things you can do…imagine doing that in your dotage?!

What we are seeing instead is retirees turning to equity release to fund their retirement (see here). While this is a sound strategy while interest rates are low, that wont always be the case, and equity release further erodes inheritances. Ever decreasing circles…

More than half of retirees polled planned to reduce their cost of living in later years to pay for retirement, while three in ten said they would save money as they would no longer need to support their family (which is the same thing really).

More concerning is that two fifths said they had no plan regarding how much they could spend each year to ensure they did not run out of money. The amount you will need in retirement will depend on a multitude of variables, including the type of lifestyle you want, the state of your health and who else you live with.

The necessary income for a minimum, moderate and comfortable retirement have been calculated by the Pensions and Lifetime Savings Association. It suggests annual amounts of £10,900, £20,800 and £33,600 a year respectively for a single person.

These figures will be a shock to most.

I use cashflow planning daily to present financial plans and prefer to use the terms, basic, comfortable and luxury for amounts of expenditure throughout working life and into retirement.

Basic expenditure covers, well the basics…house costs, food etc.

Comfortable expenditure tends to stay level until retirement and then lowers from that point onwards.

Luxury expenditure, also known as “I don’t know where it all goes” or “working and travelling into London and buying coffees, lunch and drinks” stays level until retirement and then drops off completely.

These aren’t set in stone and everyone is different (for example, some may not want comfortable to reduce at all) but I find using these terms help focus the mind away from a long itemised list of expenditure, which lets face it, most of us are never going to get round to drawing up.

If you would like a personalised cashflow plan please get in touch. Alternatively, if you simply want a quick snapshot, feel free to use the following tool which is free to sign up for.

Truth About Money

This allows you to create a picture of your financial life, your income and outgoings, view your financial projections and adjust the assumptions to suit your goals.

Let me know what you think.