Retirement is often marketed with images of happy and healthy people playing golf, going on cruises or walking in a park or the great outdoors. But your approaching retirement reality is likely to be filled with a combination of excitement, relief, worry or outright terror!
This largely depends on your planning and preparation.
But what does retirement really look like? When is the right time to prepare for it? How should you prepare for it?
The retirement reality will look very different for each individual.
What you will all have in common is that one’s opportunity and capacity to earn an income from working are either greatly diminished or disappear entirely.
If your plan is to work well into your seventies you may wish to think twice about that plan – frankly it’s not a plan at all. People often fail to appreciate the physical and mental deterioration that inevitably comes with age. I’ve seen this with family members. It’s not a pleasant thought. It’s something we all convince ourselves will not happen to us, but it is inevitable for any that are lucky enough to live long lives.
With our unwillingness to work until we drop, the competition you will have with technology and younger generations, our increasing longevity and the inability of any government in the world to keep the grandiose promises that they make, I would humbly suggest the following approach.
Take control of your own individual retirement. Do not rely on others and start preparing as soon as possible. I cannot stress enough the urgency of retirement planning.
Yesterday would have been better, but today will have to do.
Unfortunately, the above comments aren’t very persuasive and don’t particularly sell very well. Retirement has been glamorised by those who have been lucky enough to retire in their fifties, buy holiday homes and live off final salary pensions and ever increasing asset prices.
That was retirement reality for a few, but it is a mere dream for those coming after them.
The problem is demographics. There will simply be too many people trying to live off their assets, sell their properties and rely on state and corporate promises (pensions).
These three articles provide a useful introduction to the challenges.
Government and Companies have all promised you a financially comfortable retirement, but it isn’t free and the money has to come from somewhere. Unfortunately we will all find out just how difficult it will be to honour the promises that have been collectively made.
The biggest challenge when planning for your retirement is how long you are going to live. It’s an entirely unknown factor. You could smoke 30 cigarettes a day and live to the grand age of 110, or spend your life eating Kale and other so called super foods and drop dead tomorrow.
This provides a unique challenge when making your retirement plans. You don’t want to have lots of money but live like a miser, but you also don’t want to have too much life at the end of your money!
It’s therefore essential to plan ahead, stress test those plans and review them frequently. I cannot underestimate the importance of prudence when making these plans. Out of the two choices above, it is far more preferable to lean towards the miser category and be left with the problem of too much money, than to have the very real problem of running out.
It is important however to know whether you can really afford that holiday, or even that weekly meal or daily coffee.
This is where good financial planning can prove especially useful.
Here are some retirement realities that you need to incorporate into your lifestyle and financial plan.
Retirement Reality One: Travel
The media and advertisers paint an unrealistic picture of retirement. It has been glamorised. They create this idea that retirees are finally free and that they can now enjoy the things that they want like travelling the world.
This could be true for some, but you need be healthy and have the mind-set for travel.
I’ve travelled a fair bit and the reality is often different to the dream. Our imagination is powerful and we fail to understand how we will feel when thrust into uncomfortable situations. It’s one thing getting a cheap train, bus and boat combination in your twenties or thirties, it’s another thing entirely when you are in your sixties and you have had a lifetime of comfort.
This doesn’t necessarily remove the option for travel; it just ensures you are unlikely to be able to travel on a backpacker budget.
Plus you won’t have the luxury of being able to return to work if you overspend etc. It is therefore essential that you have enough money set aside for the boring stuff and set realistic travel goals during retirement.
And if you do want to experience adventurous travel, don’t put it off. Go today.
Retirement Reality Two: Leaving an inheritance
Many have the desire to leave an inheritance to their children when they pass away. However maintaining wealth over a very long period of time (say 50+ years) is actually very difficult to achieve. If it weren’t so, why are there still so many living in poverty when we have had thousands of years to advance and pass on wealth down the generations.
Unfortunately for you and me, there are many possible ways we can lose our wealth. Factors such as tax, war, competition, political disruption, technological change, natural disaster, personal poor health, overconsumption, scams and fraud, over confidence, bubbles, inflations and currency collapses to name just some of the ways your wealth can be dissipated, and how you could end up losing your shirt.
If you simply think of the cost of healthcare, tax and inflation, for most of you, you will be fortunate not to end up a financial burden on your children, let alone being able to pass on some of your wealth and prosperity.
Retirement Reality Three: Life expectancy
Many of us appear to wish to retire at age 50, yet with many of us likely to live until we are 100+, that is a very long time for our assets to support us.
For those that are able to work longer, you should expect to do so, even if it’s part-time or in a different role. For those unable to work, you need to make a realistic budget on how much you are going to spend.
Just because you are used to a set level of expenditure throughout your working life, it doesn’t mean you can afford to do so during retirement. A heavy dose of reality is prudent.
Retirement Reality Four: Care home fees
AgeUK Statistics indicate that 16% of the UK population over the age of 85 spend some time in a care home. Of those that do so, the most frequently occurring period of stay is 15 months, with 27% of those entering care staying for more than three years.
If you are lucky enough to live to over 85, but then unlucky enough to require care, it will significantly impact upon your financial position.
Care home fees do not come cheap (but it’s perhaps more favourable than your children shoving you off to the garden shed so they can receive some form of inheritance and avoid professional care costs!).
If you happen to go into care, the average cost is currently £29,250 pa for residential care, increasing to £39,300 pa if you require nursing care.
It’s not exactly cheap and it will be a huge drain on your wealth (especially if you need care for three years or longer). It would make sense to keep some money aside for this – just in case.
Perhaps instead of care you will choose to go the way of the eskimos and float away to your demise.
Speaking from the view of a relatively young man, the idea of a care home fills me with dread and I think I’d prefer to go for some type of elective senicide than suffer through the indignity of adult diapers and living in something that resembles a prison for committing the apparent crime of growing old.
But I suppose there is always fox crunch creams to keep you going!
Retirement Reality Five: Inflation
Inflation has been low for many years now. Many have now become so used to these mild levels of inflation that they mistakenly project them into the future. However our monetary system is designed to be inflationary.
Despite all the rhetoric about deflation, over the past decade the value of your money has depreciated to the tune of 28.65% (an average of 3.32% each year).
If we extrapolate the historic long-term average inflation rate since 1949 of 5.44% (as measured by RPI), we can project the following decline in the purchasing price of your money over the following time periods:
- 10 years: 42.84%
- 20 years: 67.33%
- 30 years: 81.33%
Even with low levels of inflation, you will have an extra challenge to navigate during retirement. If we experience a period of high monetary inflation, it’s very likely that you will be financially screwed.
The conclusion is that you simply need to save more. Long-term it is difficult to get by on fixed incomes that do not increase and as savers you will need to navigate actual tax as well as the inflation tax on your prosperity.
Retirement isn’t going anywhere. So it is only logical to make a financial plan for its coming eventuality. I suppose the only alternative to making sensible financial plans is to take up smoking, drinking and eating fast food in the attempt to die young; making any retirement plan wholly irrelevant.
In essence, retirement is not really about living the dream. For most of us, it is about living out our days in a secure and comfortable way.
Have you got a financial plan for your retirement reality?