If you are over 50 and thinking about retirement, American economist James Poterba has come up with eight vital questions you need to ask to find out if you have enough savings for your later years.
Like all ‘if what’ questions, the answers rather depend on your lifestyle and how you plan to spend your time.
Investment experts have a rule of thumb that five times salary tucked away in investments is a good target, but that’s fine for someone with a large disposable income, but probably not so practical for a low earner.
So what questions should you consider when sitting down to do those retirement income sums?
- When will you retire is a good place to start as the date pegs when you stop earning and start spending those savings. If you don’t have enough cash already, you will need to think about how much cash will see you through to support the lifestyle you will find comfortable.
- How long you are likely to live is next. Modern thinking reckons most people in reasonable health will spend a third of their life in retirement. If you want to retire somewhere around 55 to 60 years old, that means funding up to 30 years on average.
- How will you fill the time will make a big difference to the budget. Someone with a hankering for a trip around the world probably needs a lot more cash than another person who just wants to relax at home to take up a simple hobby.
- If you are a couple, how much money will you need to fund living together and what will happen to the one that’s left? Sooner or later poor health and long term care will come into the picture, so making provision for expensive care is important for everyone as the state will only fund the basics.
- Where will you retire? If it’s overseas, the State pension may not be index linked and the state may not offer comprehensive free healthcare.
- What about family – can they support themselves or do you need to consider setting aside some savings for looking after them as well?
- How much will the government help is open-ended. With cuts is benefits and social care and a levelling out of the state pension, the likelihood is besides the flat-rate pension, the rest is down to everyone fending for themselves
- How will investments and savings grow? Interest rates are low and likely to remain relatively low for many years, but how inflation may eat into spending power may determine how far your money goes
Answering the questions leaves a lot of doubt and shows that how much money someone needs to retire is very personal to them. Many may just get by, while others have cash to burn.
