The number I’m referring to is the amount of money and resources you need to enjoy the lifestyle you desire both now and especially when you start to work less or stop work completely. How much is enough to provide you with the things and experiences you want now, and to allow you to enjoy retirement rather than ‘live it out’?
Why should you accept that your lifestyle has to change dramatically if you work less or when you enter retirement? Cutting out holidays, taking the kids out of private school or not helping them get to university needn’t be on the cards if you have a personal financial plan.
To calculate your number you’ll need to consider current income and future earning potential. Short term and future expenditure plans and real returns on investments over inflation. You will need some assumptions in your calculations - you may wish to assume income ends at retirement but expenditure carries on to say, age 100. You may also play it safe and assume you get a 1% real return on investments. The concept is simpler than the calculation, which is complex due to the large number of variables. Luckily you only need to understand the concept.
There is software available to produce a personal financial plan that will tell you amongst other things what YOUR number is but it would be a poor financial planner that only gave you your number. You need some context relevant to your circumstances. Answers to questions like:
- How much do you need to earn or draw from your business and what can you afford to save and for how long without affecting current lifestyle?
- What real return (rate above inflation) do you need on investments per annum to hit your number? Are you taking unnecessary levels of risk with your investments?
- With taxation taking up to 50% of investment returns how do you arrange your affairs to mitigate tax and so achieve financial security sooner?
With help, getting answers to these questions is a fairly painless exercise and the benefits are more subtle and powerful than you would at first think. The personal financial plan is just that, a plan. If you don’t have a plan how do you know where you are going or indeed when you get there?
Many people defer spending because they think they can’t afford it. This is especially true when it comes to saving for retirement. You could end up working longer than your contemporaries, especially if you are running your own business, because you don’t know what you should be aiming for financially each month. In your case the personal financial plan is your exit strategy.
Alternatively you may be able to achieve your number sooner than you would realise. However if you don’t know how much is enough you could quite easily work for longer than necessary simply because you didn’t know any better.
Getting to YOUR number is a very personal endeavour. Once you have determined your number however, the sense of freedom and release is almost magical.
Andy Parker
Chartered Financial Planner, Birmingham