Traditional thinking suggests retirement savers should put enough money aside to replace 80% of their income when they give up working.
But modern financial planning is starting to reconsider if the strategy really works.
The problem is longevity.
If a retirement saver knew how long they were going to live, saving for retirement would be relatively straightforward as they would have a target to work towards.
Unfortunately, life’s not like that and none of know when the fateful day will arrive.
The argument is that lifetime retirement saving is simply a matter of deferring spending.
However, knowing how much to defer is the trick, because most people need some of that deferred spending during their working lifetime to fund emergencies and some of life’s luxuries.
Financial goals
If a saver knew how much of a retirement they needed to fund, they could put a fixed amount aside each year and then relax when they have filled the pot to the appropriate level.
The trouble is the goalposts keep moving, so most people putting a fixed sum away fall short of that 80% funding target. To meet it, they need to top up their fixed amount in the good times to balance out failing to put enough away during less well-off times.
That’s when the way retirement savers approach their financial goals comes unstuck.
Looking at accumulated wealth that gives a set return every year of 80% of working income simply is not enough.
Looking from the wrong end of the telescope leaves how long the saver will live out of the equation.
New figures from financial firm The Prudential suggest the minimum pension pot to provide a £10,000 a year income on top of the state pension will see a retirement saver through an average retirement of 20 years.
The retirement dilemma
But that’s an average. Some people live less, which is fine because they will not exhaust their savings unless they go on a spending extravaganza.
However, many people will also live another five or 10 years on top of the average, so they will either outlive their pension funds or need to put more cash aside.
For that extra five years, a pension pot of £134,000 gives that £10,000 return, but for an additional 10 years, the figure is more than £150,000.
So what does a retirement saver do?
Scrimp and save to fund a 30 year retirement or put a fixed amount away that they can afford and hope for the best?
That’s the retirement dilemma and the question financial planners can’t answer.
A meaningful and successful retirement is a result of planning. Planning for the lifestyle you want to lead and then generating a plan for funding that retirement. Retirement plans should be reviewed and adjusted if required at least once each year.I just read several good posts and pages about retirement planning, investing and retiring overseas on the site Retirement And Good Living. The site has many guest posts in its blog by expats who recently retired to Central and South America, ASia, Europe and the Caribbean.