How much do you need? A retirement calculator
Yesterday Maria published a post suggesting that, for a fulfilled life in our pre-dotage before we are off to the commune, we will need to amass some £2.5 million ($4 million) of savings and investments over the next 5 years. This will enable us to travel around, spend time in various countries, write books, fly aircraft and generally become independent during our retirement.
How to get there is another story but today I show how this calculation was done and publish the simple spreadsheet that I wrote. You can download the spreadsheet here so feel free to do that now.
Most of the cells in the spreadsheet are protected – the only ones you need to alter are the ones in green.
This doesn’t actually say how much you need – you merely change the numbers to suit your situation until it gives you the result you need. There are just too many imponderables to provide an automatic facility!
These are the numbers you need to enter:
- Your actual ‘retirement’ age is the first entry. In the UK it is possible to retire at 55 and draw your reduced pension so, apart from this being appropriate for Maria, I have entered this age in the first row (cell B2). Just to keep the under-40′s happy, there are enough rows for you to retire at 40 and see how much you will need if you survive to 100! The rest of us can ignore surplus rows.
- I then assume that there is some base income, after tax, that could be a pension, rental income on property you own or some other source which does not affect your investments. For us, our two pensions combined should give an income of about £45k a year if Maria chooses to draw hers at 55. As an income, I assume that it will rise a bit with inflation and have set a value in these sums of 2% per year. These values are the next two rows of the green box.
- Next comes the big one. Just how much are your investments worth? We have estimated, using this tool, that we will need about £2.5 mllion so that is the next value entered in the fourth row.
- The investment yield is next and here I have assumed 3% – after tax. If the investments are held within a SIPP or ISA for example (tax-free havens like 401(K)s or IRA where you don’t pay tax on the money you take out) then the yield should be a bit higher – even a lot higher! Try 10% for fun.
- The next row is an estimate of your annual needs – again after tax. We reckon that £10k ($16k) a month cash should see us nicely comfortable, given that we will have no mortgage to pay. For this, you can rent an apartment in most cities in the world and have enough to live comfortably on while writing that book. And of course we don’t want to fly economy/coach everywhere do we? Long haul is pretty uncomfortable that way.
- This value will increase of course and the next row is the spending inflation – I have also set that at 3%.
- Now c omes the difficult bit. We all assume that we will go on for ever but in fact at about 80 years old, many people do effectively hang up their boots and settle down to read the paper every day. We assume this will happen to us as well so that, after the party, we will come home and either require assistence or actually go into a home. Note that we don’t consider selling our home at this point – that’s a bonus I guess! Anyway the next row is just that age when we pull the shutters down and we have assumed 80 for now.
- We don’t of course know how much this will all cost so I have added two rows to set the current price of care (ie how much are people paying today) and the care cost inflation which I suspect is rather larger than general inflation. I have set these two values as £50k ($80k) and 5% respectively.
As you change the values in the green block, the actual values in the year-by-year table will change. Everything will be fine until your investments decrease to zero. At that point, you will need to decide whether there are cheaper ways of surviving, to sell your home or go and impose yourselves on your offspring. Having for a long time said I didn’t want to retire, I am now looking forward to retirement!
The second picture shows exactly this and that, by 90 years old, we will have run out of investments as both the Investments column and Yield column are zeros. Phew.
You can play with this tool – it will surprise you just how little money you actually need, particularly if you have some base pension and don’t want to live it up too much. Download it here. Just as an aside, if you have £10 million and feel like spending £300k a year cash until you are 85, this tool shows that you can survive in an upmarket care home until you are 100! So now you know.
What’s more, as someone who unwisely invested in a pension plan for a short time that I can’t access, doing it this way is not only cheaper than buying annuities, which just profit the insurance companies, but enables you to access your retirement funds when you need. And as annuity rates are going down, it is an even better bet! If you still feel the need to buy an annuity, you can always take up smoking or other risky habits… As a guide, a 55 year old woman in good health buying an annuity, which would be worthless in the case of an early demise without a guarantee, would generate some £90k a year which would be taxed at (say) 40% so leaving £54k which with the £45k basic is some £21k less than planned here. A suitably written will in our proposals would ensure that, however much we didn’t consider it, the benefit would carry on being paid to heirs and successors which would otherwise benefit the insurance company.