Apparently the people who worry about their financial future are the people who can afford to worry about it. I read that somewhere recently.
If you live hand to mouth, then you don’t have the luxury to do the math over what money you need whenever you choose or are forced to retire.
Only people with sufficient money worry about retirement.
By my reckoning the sufficient-money people fall into two categories.
Type one have real money. They have serious cash to invest between now and then. Not that it will necessarily all go smoothly, but still… they are highly incentivised to pay a lot of attention to how pensions work. Things could go very well for them if they do.
Type two have enough money that they live well today (not hand to mouth), but they don’t have enough surplus for anyone with real financial sense to be interested in helping them invest. For type two’s retirement is terrifying.
To save a reasonable amount for the future, most type two’s would be forced to live a lot less well today. And we are not a generation of people built to do that.
I’m a category two. And here’s what I found out about retirement this week.
In calculating how much money I need for retirement I did three things. Technically four if you count that the first thing I did is avoid the entire question for decades.
1/ I asked around …
Specifically I asked people who can count the years to their retirement on less than one hand. Most of them said the same thing: About a million. This is what they believe they need to survive their retirement.
2/ I Googled the answer
This is one of those times when Google makes things worse, not better. After quite a lot of seemingly-perfect links, in the end I only found one pension calculator that made any sense. It didn’t demand numbers I know nothing of (e.g., my current pension balance?) and it spat out numbers that even I could understand.
The calculator that proved helpful didn’t come from motley fool or money saving expert Martin Lewis or any of the obvious places to go looking for a pension calculator. It came from Aviva, an insurance company. Check it out here, in about 3 seconds it gives you an idea of what sort of money you’ll need when you retire. In theory.
3/ I asked my brother
This was always the most obvious course to take.
He’s a banker. But before he became one of those he was still the most obvious person to ask.
If asking around and Googling a pension calculator gave me fast answers, my brother gave me the long answer. The one that involved him pulling up a chair and looking around for a piece of paper and a pencil.
In the past I might’ve felt tearful half-way through this conversation, but it’s amazing what 4 months of Counting 000’s has done for my tolerance of financially stressful chats.
He confirmed several things that back up what I’d learnt Googling and asking around and these are likely to be the only 3 numbers I manage to retain of the many he flung around the place with that pencil and paper.
- 50 per cent is the target that many people tend to set themselves in terms of how much money they hope to live on after their retire — 50% of what they earn today.
- 6 per cent is the sort of return on your investment (interest on savings) you might assume you’ll earn on any money you put away for your retirement. So 10,000 in the bank right now might earn 6% in the very long run.
- 5 per cent inflation, while aggressive, is a sensible forecast of year-on-year increase that predicts what 10,000 today will equate to in real money terms down the road.
After walking me through these assumptions, he then mapped out two equations:
- How to work out how much money I need to save now if I know I want … let’s say a £1 million when I retire
- How to work out what the value of today’s £1 million will be in twenty or thirty years from now.
“These two equations are the building blocks to understanding your pension, Nat.”
We’ll be creating a spreadsheet (i.e., my own personal retirement calculator) so that I don’t have to mess around with either of these equations personally.
And from there I’ll need to do a lot of other things before I get clear on pensions (such as working out how my company pension works today, what I have in the pot and how much I should be saving).
I may end up exactly where I started — hoping for the best and not otherwise giving it much thought because it’s all too much to comprehend and/or afford.
But who knows, I might become the master of my own destiny and take on the challenge of whipping my pension into shape. Stranger things are happening. Like me even looking into any of this.
Let me know if you want a copy of the spreadsheet…