It feels like there’s a lot of uncertainty about at the moment – whether it’s Brexit or our next PM or the state of the economy. It may be concern about climate change, job security, lifestyle. Although these things seem big and out of our control there are steps we can all take to make the future a little more predictable.
Most of the people we work with want to maintain their current lifestyle. But what is lifestyle and how much does it cost? What does your life look like at the moment? Are you happy with your life or are there things you want to do to change your lifestyle?
Lifestyle can be broken down into different categories e.g.
Basics – these are the essential items we all need to pay for e.g. utilities, mortgage or rent, food, clothing, insurances, property maintenance, vehicle costs, petrol, debt repayments etc.
Discretionary – these are the extras that make life more enjoyable e.g. holidays, entertainment, eating out, sports & hobbies, school fees, wine (considered essential for some!!) etc.
Milestones – these are the one off events or purchases that often create fabulous memories e.g. new sports car, world cruise on retirement, family wedding, helping a child buy a property.
Hopefully our lifestyle is currently affordable but in future when we stop earning how do we ensure we can continue to live in the same way?
Many people they will receive a state pension in retirement although state pension age is constantly being pushed out. The pension received is typically only around 30% of annual average earnings and for many significantly less than this. This is unlikely to be sufficient to cover the basics.
Some people are members of their workplace pension. If you work in the public sector or a large company, you may be fortunate to have a defined benefit or final salary pension scheme, although these are becoming less common. Even if you are a member of a final salary scheme it is unlikely the benefits will exceed 50% of current earnings.
Therefore, in order to maintain lifestyle, it is essential funds are set aside in savings and investments during your working life to meet the shortfall between secure pension funds and total lifestyle costs.
If your average annual lifestyle expenditure is £40,000 and you only have secure income from state pension and workplace pension of £25,000 you have £15,000 to fund from savings and investments each year.
Assuming an average annual investment return of 5% (moderate risk) and an annual withdrawal of £15,000, a starting fund of £242,000 will be required to last 30 years. You can do the maths to work out your own futureproof fund or you can work with a Chartered Financial Planner to help determine your own number.
Another factor to consider is the rising cost of lifestyle over time i.e. inflation. Money held in bank savings tends to lose real value over time because of inflation and in the example the starting fund would be exhausted after just 20 years with inflation at 2.5% per annum.
So how will you pay for your next golf trip or fine dining experience and maybe more importantly how will you pay for it in 10 or 15 years’ time?