What do we want to spend money on when we retire, how about in our 80’s, and how much for long term care? How will house moves change the maths? How much of an inheritance do we want to leave to whom, or can we just ignore that?
In a really fully fleshed-out plan, those questions can be preceded by reviewing personal values and motivations and reviewing the whole lifestyle of retirement.
You can pay a financial adviser to help you do this.
Or you can think long and hard about it.
Or you can guess a few numbers like I’ve done (below) and flesh it out nearer the time.
First my wife and I made a bucket list and a list of activities we’d like to do while we’re fit (well, fittish) and incorporated it into a budget, just like our 20-30 line monthly budget, and it totalled 44k/year. Then we made a trimmed down version if we had to tighten our belts, which totalled 24k/year. This is “spend”, not “pre-tax income”.
In my plan there’s a pretty simple assumption for me and my wife.
- Up to age 74 we are trying to calculate how much we will be able to spend. Hopefully at least 44k because that’s what our “nice to have” budget adds up to.
- Age 75-83 it drops to 30k. One car only, if that. Simpler holidays.
- Age 84+ it’s 25k, and could be less. No car (unless personally-owned self-driving cars are a big thing).
Then on top of that there are two ways to consider end-of-life care. I hear of costs like 50k/person/year for typically for 2-3 years for a small minority of people. To be a bit safe, we assume spending 50k each for 3 years. So that’s 100k spend instead of the usual sum for 3 years.
The two ways I have tried to plan it are:
- Replace the spend for years aged 84-86 inclusive with 100k instead of 25k (and use 25k after that).
- Use the original annual spends but make sure there’s never less than (100-25)x3 = 75×3 = 225k capital in pensions and ISAs.
Our house value is a back-up for all this. We assume we don’t release equity, and here’s why.
In reality we have a thought to move twice more (stamp duty being a real dampener on moving: don’t get me started on what that is doing to society).
One move in the next few years to our dream home, which could have more hobby rooms and is very close to woods or parkland for walking the dogs (or grand-kids). This move might consume an extra 100k that would be released later.
A final move in our 70’s to somewhere not too big that is near shops and transport and with easy access to a hospital. Sad, eh? But realistic, I fear. This is a real down-size, probably releasing capital, but many properties have a service charge or communal charge so the released capital might be needed in part for that.
The first move is tricky to finance because from retirement to age 67 we are taking faster than natural yield from SIPP/DC funds. If stock markets fall, and we take an extra 100k for a house, it all gets a bit dodgy. Really we would prefer to find a house that we want at the same value as our current house.
If (!) property prices keep up with equity returns then we get our 100k back later with interest.
The house value is in effect a buffer in case the whole SIPP/DC part of our pension grows much worse than we thought, and then we trade down sooner and do a lot of recalculation. I want that to be available and flexible, not in the control of an equity release scheme. I’ve already seen the way that shared equity house purchase schemes work and I want to stay well clear of that kind of thing for myself.